<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

   [X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities
        Exchange Act of 1934 For the fiscal year ended MAY 31, 1999 or

   [ ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
        Exchange Act of 1934 For the transition period from __________ to
        __________

        COMMISSION FILE NUMBER 1-9927

                         COMPREHENSIVE CARE CORPORATION
             (Exact name of Registrant as specified in its charter)

        DELAWARE                                                95-2594724
(State or other jurisdiction of                             (IRS Employer
incorporation or organization)                              Identification No.)

4200 WEST CYPRESS STREET, SUITE 300
         TAMPA, FLORIDA                                            33607
(Address of principal executive offices)                        (Zip Code)

                                 (813) 876-5036
              (Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

<TABLE>
<CAPTION>
       Title of each class                   Name of each exchange on which registered
       -------------------                   -----------------------------------------
<S>                                          <C>
COMMON STOCK, PAR VALUE $.01 PER SHARE            OVER THE COUNTER BULLETIN BOARD
     COMMON SHARE PURCHASE RIGHTS                 OVER THE COUNTER BULLETIN BOARD
</TABLE>

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2010        OVER-THE-COUNTER
                (Title of class)

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                                  Yes   X      No
                                                      -----      -----

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]

         The aggregate market value of voting stock held by non-affiliates of
the Registrant at August 18, 1999, was $1,908,906 based on the closing sale
price of the Common Stock on August 18, 1999, as reported on the Over The
Counter Bulletin Board.

         At August 18, 1999, the Registrant had 3,817,811 shares of Common Stock
outstanding.




<PAGE>   2


                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

                                     PART I

                                ITEM 1. BUSINESS

ORGANIZATIONAL HISTORY

         Comprehensive Care Corporation(R) (the "Company") is a Delaware
Corporation organized in 1969. Unless the context otherwise requires, all
references to the Company include Comprehensive Behavioral Care, Inc.SM (1)
("CompCare"SM (2) or "CBC") and subsidiary corporations. Prior to fiscal year
1993, the Company principally engaged in the ownership, operation and management
of psychiatric and substance abuse programs in Company owned, leased, or
unaffiliated hospitals. During Fiscal 1999, the Company completed its plan to
dispose of its hospital business segment.

         Commencing in Fiscal 1993, the Company transitioned its business focus
to managed behavioral healthcare products and services through its wholly owned
subsidiary, CompCare. In addition to its managed care products, the Company
continues to provide contract services through its subsidiary, Comprehensive
Care Integration, Inc. ("CCI").  The Company's chief focus is its managed care
business.

As of May 31, 1999, the Company had the following active subsidiaries:

<TABLE>
<CAPTION>
     Wholly-owned subsidiaries of Comprehensive Behavioral Care, Inc.:          State of Incorporation
     -----------------------------------------------------------------          ----------------------
     <S>                                                                        <C>
     Comprehensive Behavioral Care, Inc.                                              Nevada
     Healthcare Management Services, Inc.                                             Michigan
     Healthcare Management Services of Michigan, Inc.                                 Michigan
     Healthcare Management Services of Ohio, Inc.                                     Michigan
     Behavioral Health Management, Inc.                                               Michigan
     Comprehensive Health Associates                                                  Puerto Rico

<CAPTION>
     Wholly-owned subsidiaries of Comprehensive Care Corporation, Inc.:
     ------------------------------------------------------------------
     <S>                                                                              <C>
     Comprehensive Care Integration, Inc.                                             Delaware
     Care Institute                                                                   California

<CAPTION>
     Affiliates sponsored by Comprehensive Behavioral Care, Inc.
     -----------------------------------------------------------
     <S>                                                                              <C>
     Comprehensive Provider Networks of Texas, Inc.                                   Texas
     Comprehensive Innovations Institute                                              Texas
</TABLE>


         The following table sets forth, for each of the years in the five-year
period ended May 31, 1999, the percentage of operating revenues from the
Company's managed care operations, contract and other operations, and
discontinued operations.

<TABLE>
<CAPTION>
                                                                               YEAR ENDED MAY 31,
                                                              1999      1998        1997     1996    1995
                                                              -----     ----       ----      ----    ----
         <S>                                                  <C>       <C>        <C>       <C>     <C>
         Managed care operations (1)........................    87%       83%        72%       49%     19%
         Contract and other operations......................     3%        3%        11%       18%     19%
         Discontinued operations............................    10%       14%        17%       33%     62%
                                                              ----      ----       ----      ----    ----
                                                               100%      100%       100%      100%    100%
                                                              ====      ====       ====      ====    ====
</TABLE>

--------------------
(1)  The Company has provided managed care products since the acquisition of
     AccessCare, Inc. in December 1992. On August 1, 1995, the Company renamed
     this subsidiary to Comprehensive Behavioral Care, Inc.SM


--------------------
(1) Comprehensive Behavioral Care, Inc. is a registered service mark of the
    Company.
(2) CompCare is a registered service mark of Comprehensive Behavioral Care, Inc.


                                       2
<PAGE>   3

           COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

RECENT DEVELOPMENTS

-    During the current fiscal year, CBC successfully completed an NCQA
     corporate review and, as of August, 1999, the Company's Southeast region
     operation has been awarded one-year NCQA accreditation.

-    During the current fiscal year, the Company sold its remaining hospital
     facilities and, as a result, has completed its disposal plan for this
     business segment.

-    During the current year, the Company completed implementation of a fully
     integrated managed care information system designed to improve service,
     tracking, and reporting (see Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS
     OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS").

-    The Company's contract with PCA Health Plans of Puerto Rico, Inc. ("PCA"),
     a subsidiary of Humana, Inc., terminated on March 31, 1999. Following the
     extension period that ended April 30, 1999, the Company underwent a
     restructuring that included downsizing in Puerto Rico and a workforce
     reduction at the corporate office in Tampa, Florida. Approximately 95
     positions have been eliminated.

-    During the current fiscal year, the Company provided behavioral healthcare
     services to members of the HIP of New Jersey ("HIP") Plan, a managed care
     company that was placed in court-ordered rehabilitation and subsequently
     dissolved. The Company received approximately $0.4 million from HIP
     following the start of the liquidation process and has recently filed a
     claim with the HIP estate to recover an additional amount of approximately
     $1.3 million, although there can be no assurance that the Company will
     receive any amount from the HIP estate. During Fiscal 1999, the Company
     recognized approximately $0.7 million of bad debt expense specific to this
     contract.

-    During the current fiscal year, the Company's Common Stock began trading on
     the Over-the-Counter Bulletin Board after the New York Stock Exchange
     notified the Company in February, 1999 that the Exchange intended to
     initiate action to remove the Company's Common Stock from listing on the
     Exchange.

-    The Company currently has six contracts with one HMO to provide behavioral
     healthcare services to contracted members in Texas. These combined
     contracts represented approximately 6.9% and 5.5% of the Company's
     operating revenue from continuing operations for Fiscal 1999 and 1998,
     respectively. The Company recently received written notice from the Texas
     HMO that, effective September 1, 1999, this HMO has selected another
     behavioral healthcare company to manage care for the members covered under
     four of the six contracts. The HMO cited their obligation to another
     behavioral healthcare company, under terms and conditions that are tied to
     an acquisition, as the reason for cancellation of these contracts.
     Additionally, the letter stated that the Company's two remaining contracts
     with this HMO will remain in effect through August 31, 2000. These two
     contracts accounted for approximately 3.7% and 2.1% of operating revenue
     from continuing operations for Fiscal 1999 and 1998, respectively.

OPERATIONAL OVERVIEW

        For the fiscal year ended May 31, 1999, the Company had a net loss
from continuing operations of $3.0 million, which included approximately $0.9
million of bad debt expense specific to two major contracts that terminated
during Fiscal 1999, $0.3 million of bad debt expense specific to hospital
accounts receivable that were written off after the March 11, 1999 disposal
date, and $0.2 million of bad debt expense specific to CCI contracts that were
terminated prior to May 31, 1999. Additionally, the Company incurred $0.8
million of expense in its unsuccessful bid for a managed care contract in
Argentina and approximately $0.6 million of restructuring costs related to the
loss of the PCA contract in Puerto Rico. These expenses were offset by an
extraordinary gain of $0.1 million related to the debenture exchange. This
compares to net income of $1.5 million from continuing operations for the same
period of 1998, which included $1.3 million of income relating to an adjustment
made in the Company's estimated claims payable reserve. Stockholders' deficit
increased to $4.9 million in Fiscal 1999 from $1.3 million as of May 31, 1998.
Cash and cash equivalents improved to $8.0 million as of May 31, 1999, from
$6.0 million as of May 31, 1998. Managed care operations accounted for
approximately 87% of the Company's operating revenues with contract,
discontinued operations, and other operations accounting for 13% of the
Company's operating revenues for the fiscal year ended May 31, 1999.

BUSINESS GENERAL

        Comprehensive Behavioral Care manages the delivery of a continuum of
psychiatric and substance abuse services to commercial, Medicare, and Medicaid
members on behalf of health maintenance organizations


                                       3
<PAGE>   4

           COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES


("HMOs"), preferred provider organizations ("PPOs"), and state and county
governments. The services provided by managed care operations are delivered
through management service agreements, administrative service agreements, and
capitated contracts. Under capitated contracts, the primary payor of healthcare
services pre-pays a fixed, per member per month ("PMPM") fee for covered
psychiatric and substance abuse services to the Company regardless of actual
member utilization. Current services include a broad spectrum of inpatient and
outpatient mental health and substance abuse therapy, counseling, and supportive
interventions. Programs are contracted through inpatient facilities as well as
through experienced outpatient practitioners.

        The Company has an incentive to keep its members healthy and to manage
its costs through measures such as the monitoring of hospital inpatient
admissions and the review of authorizations for various types of outpatient
therapy. The goal is to combine access to quality behavioral healthcare services
with effective management controls in order to ensure the most cost-effective
use of healthcare resources.

                             MANAGED CARE OPERATIONS

        The Company provides managed behavioral healthcare and substance abuse
services for employers, HMOs, PPOs, government organizations, third-party claim
administrators, and commercial and other group purchasers of behavioral
healthcare services. The Company currently provides services to contracted
members in seven states and provides managed behavioral healthcare services to
Medicaid recipients through subcontracts with HMOs focused on Medicaid and
Medicare beneficiary populations. Medicaid is a state operated program that uses
both state and federal funding to provide healthcare services to qualified
low-income residents. The programs and services currently offered by the
Company's managed care operations include fully integrated, capitated behavioral
healthcare services; Employee Assistance Programs (EAPs), case
management/utilization review services; administrative services management,
provider sponsored health plan development; preferred provider network
development, and management and physician advisor reviews; and overall care
management services. Fully integrated capitated lives totaled approximately
571,000 and 1,014,000 at May 31, 1999, and 1998, respectively. ASO lives were
approximately 217,000 and 199,000 at May 31, 1999, and 1998, respectively. EAP
lives were approximately 60,000 and 63,000 at May 31, 1999, and 1998,
respectively. The Company manages its clinical service programs using proven
treatment technologies and trains its providers to use effective, science-based
treatment.

        Managed care operations accounted for approximately 97% of the Company's
operating revenues from continuing operations in Fiscal 1999, versus 96% in
Fiscal 1998.

SOURCES OF REVENUE

        The Company provides managed behavioral healthcare and substance abuse
services to its members under contract. Generally, the Company receives a
negotiated amount on a PMPM or capitated basis to provide these services. The
Company then contracts directly with providers who receive a pre-determined
fee-for-service rate, case rate, or, alternatively, the Company may contract
with an integrated provider company on a sub-capitated basis. Behavioral
healthcare providers include psychiatrists, clinical psychologists, and other
licensed healthcare professionals. Under full-risk capitation arrangements, the
Company is responsible for the development and management of service networks,
including physicians, therapists and hospitalization services and all claims are
managed and paid by the Company. In cases where the Company has made
sub-capitation arrangements, the outside company manages service delivery
through a Company approved and credentialed network guided by stringent quality
standards. In most cases, claims are paid by the Company and deducted from the
capitation payment.

DELIVERY OF HEALTHCARE SERVICES

        Members are usually directed to the Company by their employer, HMO, or
physician and, if deemed appropriate, receive an initial authorization for a
consultation. Based upon the initial consultation, a treatment plan is
established for the member. The Company attempts to control its healthcare
expense risk by entering into contractual relationships with healthcare
providers, including hospitals, physician groups and other managed care
organizations, either on a sub-capitated, discounted fee-for-service, or
per-case basis. During Fiscal 1999, the Company provided services under
capitated arrangements for commercial, Medicare and Medicaid patients in Florida
and Texas, commercial and Medicaid patients in Puerto Rico, New Jersey, and
Michigan, and commercial patients in Indiana, Idaho, Ohio and Pennsylvania.



                                       4
<PAGE>   5
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

         The new business in fiscal year 1999 included capitated arrangements
under ASO contracts, in which the client reimburses the Company for the costs
of overall behavioral healthcare services rendered through contracted
providers. Additionally, the Company has recently been awarded contracts in
Florida, Georgia and Michigan that have effective dates beginning in Fiscal
2000. The Company performs periodic reviews of its current contracts with
payors and may amend or review the terms of unprofitable contracts.

OVERVIEW OF BEHAVIORAL HEALTHCARE INDUSTRY

         Behavioral healthcare involves the treatment of a variety of behavioral
health conditions such as emotional and mental health problems, substance abuse,
and other personal concerns that require outpatient and inpatient therapy. The
complexity of these conditions has required expanded services to address social
issues that exacerbate illness. There is a growing emphasis on the correlation
between physical and mental illness, with resultant expansion of joint HMO and
managed behavioral healthcare organization ("MBHO") programs. As new
psychotropic medications have become available, HMOs have expressed to MBHOs
their interest in the expansion of pharmacy management.

         Industry sources estimate that approximately $95 billion was spent on
behavioral healthcare services in 1997, or approximately 9% of total U.S.
healthcare spending. Behavioral healthcare spending includes money spent on
mental health and chemical dependency treatment and does not include spending on
psychotropic medications. In response to escalating costs, behavioral healthcare
companies, such as Comprehensive Behavioral Care, have expanded their focus on
member care and arranging for the appropriate level of service in a
cost-effective manner. As a result of the transition to managed behavioral
healthcare, occupancy rates and average length of stay for inpatient facilities
have declined, while outpatient treatment and alternative care services have
increased.


GROWTH STRATEGY

         The Company's objective is to expand its presence in both existing and
new managed behavioral healthcare markets by obtaining new contracts with HMOs,
corporations, government agencies, and other payors through its reputation of
providing quality managed behavioral healthcare services with the most
cost-effective use of healthcare resources. New products for existing and
potential clients include psychotropic pharmacy benefit management, violence
prevention and intervention, and catastrophic care management for medical and
psychiatric illness.

         CompCare is actively pursuing the expansion of their Criminal Justice
programs. CompCare has developed its Behavioral Corrections Program and is
currently under contract with the state of Idaho to provide behavioral
healthcare services to inmates and parolees. The Company has rendered a full
range of corrections healthcare services in the state of Idaho and is now
offering such services to new markets. The Company believes that the
privatization of corrections healthcare services will continue to provide
opportunities for the Company to expand the number and scope of its contracts
with state and federal correctional facilities. Additionally, the Company is
developing products that will bring its core competencies to new service areas
such as behavioral pharmacy management, juvenile justice, and public school
systems.

COMPETITION

         The behavioral healthcare industry is highly competitive, with
approximately two dozen managed behavioral healthcare companies providing
service for more than 149 million lives in the United States. Additionally,
there are numerous local and regional group practices, community mental health
centers and behavioral healthcare hospitals that manage behavioral healthcare on
behalf of HMOs, PPOs and local governments. In the last several years, most
markets have seen greater migration to fully capitated HMO products, which is
the Company's primary niche. As a consequence of these changes, marketplace
spending on managed behavioral healthcare services is expected to grow.

         The Company is subject to numerous state and federal regulations, as
well as changes in Medicaid and Medicare reimbursement. As of May 31, 1999, the
Company managed approximately 282,000 lives covered through Medicaid in Florida
and Texas. In addition, the Company manages approximately 12,000 lives covered
through Medicare in Florida and Texas. At this time, the Company is unable to
predict what effect, if any, changes in Medicaid and Medicare legislation may
have on its business (see "Business - Government Regulation").



                                       5
<PAGE>   6
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES


                              GOVERNMENT REGULATION

REGULATORY MONITORING AND COMPLIANCE

         The Company is subject to extensive and evolving state and federal
regulations. These regulations range from licensure and compliance with
regulations related to insurance companies and other risk-assuming entities, to
licensure and compliance with regulations related to healthcare providers. These
laws and regulations may vary considerably among states. As a result, the
Company may be subject to the specific regulatory approach adopted by each state
for regulation of managed care companies and for providers of behavioral
healthcare treatment services.

         The Company is licensed to operate in Michigan as a Limited Health
Service Organization ("LHSO") and is required to comply with certain laws and
regulations that, among other things, may require the Company to maintain
certain types of assets and minimum levels of deposits, capital, surplus,
reserves, or net worth.

         In many states, entities that assume risk under contract with licensed
insurance companies or HMOs have not been considered by state regulators to be
conducting an insurance or HMO business. As a result, the Company has not sought
licensure as either an insurer or HMO in certain states.

         Currently, management cannot quantify the potential effects of
additional regulation of the managed care industry, but such costs will have an
adverse effect on further operations to the extent that they are not able to be
recouped in future managed care contracts. Management believes that the Company
is currently in material compliance with the laws and regulations of the
jurisdictions in which it operates.


                                  ACCREDITATION

         To develop standards that effectively evaluate the structure and
function of medical and quality management systems in managed care
organizations, the National Committee on Quality Assurance, ("NCQA") has
developed an extensive review and development process in conjunction with the
managed care industry, healthcare purchasers, state regulators, and consumers.
The Standards for Accreditation of Managed Behavioral Healthcare Organizations
used by NCQA reviewers to evaluate a managed behavioral healthcare organization
address the following areas: quality improvement; utilization management;
credentialing; members' rights and responsibilities; access, availability,
referral and triage; preventative care guidelines; and medical records. These
standards validate that a managed behavioral healthcare organization is founded
on principles of quality and is continuously improving the clinical care and
services it provides. NCQA also utilizes Health Plan Employer Data and
Information Set ("HEDIS"), which is a core set of performance measurements
developed to respond to complex but clearly defined employer needs as standards
for patient care and customer satisfaction. Comprehensive Behavioral Care
believes it meets the standards for NCQA accreditation and has adopted HEDIS
performance and reporting standards. CBC successfully completed its NCQA
corporate review and, as of August 1999, CBC's Southeast Region operation has
been awarded one-year NCQA accreditation, a distinction achieved by only three
behavioral healthcare companies to date.

                          ADMINISTRATION AND EMPLOYEES

         The Company's executive and administrative offices are located in
Tampa, Florida, where management maintains operations, business development,
accounting, and governmental and statistical reporting functions. The Company
currently employs a total of 147 employees who are assigned to its operations as
follows:

<TABLE>
<CAPTION>
                                                TOTAL EMPLOYEES       % OF TOTAL
                                                ---------------       ----------
         <S>                                    <C>                   <C>
         Managed care operations.............         119                  81%
         Corporate or other operations.......          28                  19
                                                    -----                ----
                  Total......................         147                 100%
                                                    =====                ====
</TABLE>



                                       6
<PAGE>   7
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES


                         MANAGEMENT INFORMATION SYSTEMS

         The Company has completed its transition from the UniCare data system
to a fully integrated information system designed as a complete managed care,
three-tier application. The system, known as Nichols TXEN ("TXEN"), was
developed by Nichols Research, and the Company is a licensed user of the TXEN
system. The Company has implemented this system as a focused managed behavioral
healthcare system in its three active regions. The Company views the system to
be adequate for its current and future needs.

         All locations are strategically connected to the Company's frame relay
telecommunications network, allowing automated call-path routing to overlap
coverage for peak call times. Electronic access is provided and encouraged
between the Company and all provider groups wishing to participate in e-mail,
electronic billing, and electronic forms. Major care functions such as
assessment information, service plans, initial authorizations, extension
requests, termination summaries, appeals, credentialing, billing, and
claim/encounter processing are backed by decision aids to correctly adjudicate
patient-specific transactions.


                               MARKETING AND SALES

         The Company's business development staff is responsible for generating
new sales leads and for preparing proposals and responses to formal commercial
and public sector Requests for Proposals ("RFPs"). The Company has restructured
its marketing activities by expanding its marketing initiatives at the regional
level. CBC's Chief Executive Officer has recently assumed responsibility for all
business development. Additionally, regional sales personnel have been hired to
expand local presence and accountability. Sales expectations are integrated into
the performance requirements for executive staff, regional vice presidents and
local sales personnel. Product lines have been expanded and criminal justice
markets are targeted for significant growth.




                                       7
<PAGE>   8

           COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES


ITEM 2.  PROPERTIES

         The following table sets forth certain information regarding the
properties owned or leased by the Company at May 31, 1999. All leases are triple
net leases, under which the Company bears all costs of operations, including
insurance, taxes, and utilities. The Company is responsible for specified
increases in taxes, assessments and operating costs relating to its California
facilities.

<TABLE>
<CAPTION>
                                                                         OWNED OR          LEASE      MONTHLY RENTAL
                         NAME AND LOCATION                                LEASED        EXPIRES(1)     (IN DOLLARS)
---------------------------------------------------------------------  --------------  -------------- ---------------
<S>                                                                    <C>             <C>            <C>
CORPORATE HEADQUARTERS, REGIONAL, ADMINISTRATIVE,
AND OTHER OFFICES
   Corona del Mar, California (Administrative Offices) (2)(3).....        Leased           2006          $15,192
   Tampa, Florida, Corporate Headquarters and Southeastern
   Regional Offices...............................................        Leased           2001           25,713
   Grand Prairie, Texas...........................................        Leased           2000            7,130
   Houston, Texas.................................................        Leased           2000            1,735
   Guaynabo, Puerto Rico  (4).....................................        Leased           2004            8,655
   Naranjito, Puerto Rico ........................................        Leased           2001            1,520
   Bloomfield Hills, Michigan.....................................        Leased           2000            4,667
   Comprehensive Care Integration, Inc., Boise, Idaho.............        Leased           2000          $ 2,085
</TABLE>

---------------
(1)  Assumes all options to renew will be exercised.
(2)  The Company entered into a sublease agreement for 3,992 square feet, or
     58%, of the total area leased. The subleasee pays $8,815 of the total
     monthly rental agreement as of May 31, 1999 (see Note 21 to the audited
     consolidated financial statements -- "Related Party Transactions").
(3)  The Company's deposit for this lease, which totals $0.1 million, covers the
     rental amount for the final eight month period under the lease.
(4)  The Company has an option to terminate the lease at any time with a 90-day,
     written notice. However, the Company is required to pay an early
     termination penalty equal to one month's rent for each full year remaining
     under the lease.


ITEM 3.  LEGAL PROCEEDINGS

(1)      Although no formal claim has been made or asserted, Humana Health Plans
         of Puerto Rico, Inc. ("Humana") has claimed that the Company owes $3.0
         million to Humana in connection with the contract that was terminated
         by Humana on March 31, 1999. Humana's claim relates to the pharmacy and
         laboratory costs incurred by Humana throughout the contract period. The
         Company has expressed to Humana its total disagreement with Humana's
         position. The Company believes that Humana owes the Company in excess
         of $3.0 million in relation to this same issue; however, the Company
         has not formally asserted such claim. The Company does not believe that
         Humana's claim will have a material adverse effect on the Company's
         financial position, results of operations and cash flows.

(2)      On February 19, 1999, the California Superior Court denied the
         Company's Petition for Writ of Mandate of an adverse administrative
         appeal decision regarding application of the Maximum Inpatient
         Reimbursement Limitation ("MIRL") to Medi-Cal reimbursement paid to
         Brea Neuropsychiatric Hospital for its fiscal periods 1983 through
         1986. This facility was owned by the Company until its disposal in
         fiscal year 1991. The subject matter of the Superior Court action
         involved the refusal of the administrative law judge to order further
         reductions in the liability for costs associated with treating high
         cost, long stay Medi-Cal patients, which are commonly referred to as
         "outliers". The Company does not plan to appeal the California Superior
         Court decision for which the Notice of Entry of Judgment was entered on
         February 26, 1999. As of May 31, 1999, the Company has $1.1 million
         accrued relating to this matter.

  (3)    On January 22, 1999, PMR Corporation ("PMR") commenced an action
         against the Company in San Diego Superior Court. This action seeks
         damages for alleged breach of a hospital management agreement in
         connection with the Aurora, Colorado facility. The Complaint seeks
         compensatory damages of approximately $455,000, plus interest and
         attorneys' fees. The Superior Court ordered this case into arbitration
         on March 26, 1999. PMR has filed a demand for arbitration of this
         dispute before the American Arbitration Association, to which the
         Company has not yet responded. The Company has filed a counter-


                                       8
<PAGE>   9
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES


         claim in the arbitration for PMR's alleged breach of the same hospital
         management agreement and intends to actively defend this action. The
         Company does not believe that the impact of this claim will have a
         material adverse effect on the Company's financial position, results of
         operations and cash flows.

(4)      On September 22, 1998, the Company commenced an action against HIP of
         New Jersey ("HIP") in the United States District Court for the District
         of New Jersey. Several causes of action were asserted; the principal
         one is for breach of contract and the Company is seeking $1.1 million
         of compensatory damages for the failure of HIP to pay certain cost
         savings and other monies due to Comprehensive Behavioral Care, Inc.
         pursuant to a written agreement.

          In December, 1998, the Company received the "Notice to Network
         Providers of HIP, in Rehabilitation" ("Notice") that disclosed HIP had
         been placed in rehabilitation by the State of New Jersey, with the
         Commissioner of the Department of Banking and Insurance as named
         Rehabilitator. In accordance with the initial plan of rehabilitation,
         the Company had agreed to provide services to members of HIP at 75% of
         the Company's contract rate for the duration of the period of
         rehabilitation, or for 90 days, whichever period was shorter. The
         Company's contract with HIP terminated on March 31, 1999.

         In February 1999, there was a court-ordered dissolution of HIP and the
         State of New Jersey began the liquidation process. On March 31, 1999,
         the Company entered into a settlement agreement with HIP that required
         HIP to pay approximately $0.4 million to the Company in settlement of
         the Company's claim that was initiated in September 1998. The
         settlement does not limit or preclude the right of the Company to
         receive its pro-rata share of future distributions from HIP.
         Additionally, the Company recently filed a claim with the HIP estate to
         recover an additional amount of approximately $1.3 million, although
         there can be no assurance that the Company will receive any amount from
         the HIP estate.


  (5)    In connection with the filing of its Federal income tax returns for
         fiscal years 1995 and 1996, the Company filed for a tentative refund to
         carry back losses described in Section 172(f) of the IRC, requesting a
         refund to the Company of $9.4 million and $5.5 million, respectively,
         of which refunds of $9.4 million and $5.4 million were received. In
         addition, the Company also filed amended Federal income tax returns for
         fiscal years prior to 1995, requesting similar refunds of losses
         carried back under Section 172(f) of $6.2 million for 1986; $0.4
         million for 1985; $0.7 million for 1983; and $0.4 million for 1982, a
         total of $7.7 million.

         During fiscal years 1997 and 1996, the Company recognized a portion of
         the refunds received as a tax benefit of $0.3 million and $2.4 million,
         respectively. The balance of the refunds received, $12.1 million, are
         recorded as a deferred liability, "Unbenefitted tax refunds received"
         pending resolution by the IRS of the appropriateness of the Section
         172(f) carryback. The additional refunds requested under Section 172(f)
         for prior years of $7.7 million have not been received, nor has the
         Company recognized any tax benefit related to these potential refunds.

         Section 172(f) of the IRC provides for a ten-year net operating loss
         carryback for specific losses attributable to (1) a product liability
         or (2) a liability arising under a federal or state law or out of any
         tort if the act giving rise to such liability occurs at least three
         years before the beginning of the taxable year. The applicability of
         Section 172(f) to the type of business in which the Company operates is
         unclear. No assurance can be provided that the Company will be able to
         retain the refunds received to date or that the other refunds requested
         will be received.

         As a result of the Section 172(f) carryback claims filed by the
         Company, and the tentative refunds received, the Company came under
         audit with respect to the tax years previously mentioned.

         On August 21, 1998, the Company received an examination report, dated
         August 6, 1998, from the IRS advising the Company that it was
         disallowing $12.4 million of the $14.8 million of refunds previously
         received, and the additional refunds requested of $7.7 million. If the
         position of the IRS were to be upheld, the Company would be required to
         repay $12.4 million in refunds previously received, plus accrued
         interest of approximately $4.0 million through May 31, 1999.
         Accordingly, the Company would be entitled to a repayment of the fees
         advanced to its tax advisor relating to these refund claims of
         approximately $2.5 million of which $2.4 million is reported as "other
         receivable" in the accompanying balance sheet. This report commences
         the administrative appeals process. The Company filed a protest letter
         with the IRS on November 6, 1998 and believes that its position with
         respect to its right to the tax refunds received will be


                                       9
<PAGE>   10
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES


         upheld. The Company's tax advisor relating to these refund claims has
         advised management that the administrative appeals process could take
         twelve to eighteen months. In the event the Company wishes to further
         protest the results of its administrative appeal, it may further appeal
         to the United States Tax Court following the final determination of the
         administrative appeal. The Company has been advised that a
         determination by the United States Tax Court could take up to an
         additional twelve months from commencement of the appeals process in
         the United States Tax Court. The IRS reserves the right to assess and
         collect the tax previously refunded to the Company at any time during
         the appeals process.

(6)      On December 29, 1997, Ms. Kerri Ruppert, the former Chief Financial
         Officer of the Company, commenced an action against the Company and its
         Chairman, Chriss W. Street, in the Superior Court of the State of
         California arising out of the termination of her employment on
         September 29, 1997. The action alleges alternate causes of action based
         upon her employment relationship with the Company and seeks unspecified
         damages for unpaid wages, unspecified actual, compensatory and punitive
         damages; damages for emotional distress; and costs, legal fees and
         penalties under applicable California law. As of May 31, 1999, the
         action is in the discovery phase. The Company has denied its liability
         and has denied the principal allegations of the complaint. The Company
         believes that it has good and meritorious defenses to this action.

         From time to time, the Company and its subsidiaries are also parties to
and their property is subject to ordinary, routine litigation incidental to
their business. In some pending cases, claims exceed insurance policy limits and
the Company or a subsidiary may have exposure to liability that is not covered
by insurance. Management believes that the outcome of such lawsuits will not
have a material adverse impact on the Company's financial statements.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         Not applicable.



                                       10
<PAGE>   11
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES


                                    PART II.

ITEM 5.  MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a)      During Fiscal 1999, the Company's Common Stock was traded on the New
         York Stock Exchange through February 18, 1999. In February 1999, the
         Exchange notified the Company that the Exchange intended to initiate
         action that would remove the Company's Common Stock from listing on the
         Exchange.

           Beginning on February 23, 1999, the Company's Common Stock is traded
         on the Over The Counter Bulletin Board ("OTC-BB") under the symbol
         CHCR. The following table sets forth the range of high and low closing
         prices for the Common Stock for the fiscal quarters indicated:

                                                                        PRICE
<TABLE>
<CAPTION>
          FISCAL YEAR                                 HIGH              LOW
          -----------                             -------------    --------------
          <S>       <C>                           <C>              <C>
          1999:     FIRST QUARTER                 $  10 15/16(1)   $ 3  7/8  (1)
                    SECOND QUARTER                    5  1/4 (1)     2  1/8  (1)
                    THIRD QUARTER                     5  3/4 (1)        7/8  (2)
                    FOURTH QUARTER                $   1  1/16(2)   $    1/2  (2)

          1998:     FIRST QUARTER                 $  15  1/8 (1)   $10  3/4  (1)
                    SECOND QUARTER                   11 11/16(1)     8 13/16 (1)
                    THIRD QUARTER                    11  1/2 (1)     6       (1)
                    FOURTH QUARTER                $  12 15/16(1)   $ 9  5/16 (1)
</TABLE>

         (1)      Indicates high and low closing prices as reported by the New
                  York Stock Exchange.

         (2)      Indicates high and low closing prices as reported by the
                  OTC-BB.


(b)      As of July 31, 1999, the Company had 1,501 stockholders of record of
         Common Stock.

(c)      The Company did not pay any cash dividends on its Common Stock during
         any quarter of Fiscal 1999, 1998, or 1997 and does not contemplate the
         initiation of payment of any cash dividends in the foreseeable future
         (see ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS").


ITEM 6.  SELECTED FINANCIAL DATA

         The following tables summarize selected consolidated financial data and
should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere in this report. Reclassifications of prior
year amounts have been made to conform to the current year's presentation (see
ITEM 7 -- "Management's Discussion and Analysis of Financial Condition and
Results of Operations").


                                       11
<PAGE>   12
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES


<TABLE>
<CAPTION>

                                                                                    YEAR ENDED MAY 31,
STATEMENT OF OPERATIONS DATA:                                       1999        1998         1997       1996         1995
                                                                  --------    --------    --------    --------     --------
                                                                        (Amounts in thousands, except per share data)
<S>                                                               <C>         <C>         <C>         <C>         <C>
OPERATING REVENUES ............................................   $ 39,029    $ 39,787    $ 32,531    $ 21,742    $ 11,081
COSTS AND EXPENSES:
   Healthcare operating expenses ..............................     32,252      32,755      27,996      18,258      11,466
   General and administrative expenses ........................      6,674       5,138       7,383       8,150       4,406
   Provision for doubtful accounts ............................      1,641          94         228         298         155
   Depreciation and amortization ..............................      1,037         772         685         715         500
   Restructuring expenses .....................................        600          --         195          94          --
   Equity in loss of unconsolidated affiliates ................         --          --          --         191          --
                                                                  --------    --------    --------    --------    --------
                                                                    42,204      38,759      36,487      27,706      16,527
                                                                  --------    --------    --------    --------    --------
OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS ............     (3,175)      1,028      (3,956)     (5,964)     (5,446)

OTHER INCOME (EXPENSES):
   Write-down of assets .......................................         --          --          --          --        (741)
   Gain on sale of assets .....................................          2         314          47       1,336         836
   Loss on sale of assets .....................................         (4)         (9)        (33)        (82)       (354)
   Non-operating gain (loss) ..................................        (79)         50        (390)        860          --
   Interest income ............................................        309         406         259         210          38
   Interest expense ...........................................       (281)       (172)       (732)     (1,374)     (1,366)
                                                                  --------    --------    --------    --------    --------
                                                                       (53)        589        (849)        950      (1,587)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ..     (3,228)      1,617      (4,805)     (5,014)     (7,033)

Income tax expense (benefit) ..................................       (146)         63        (341)     (2,478)        180
                                                                  --------    --------    --------    --------    --------
INCOME (LOSS) FROM CONTINUING OPERATIONS ......................     (3,082)      1,554      (4,464)     (2,536)     (7,213)

DISCONTINUED OPERATIONS:
Income (loss) from operations, less applicable income tax
expense of $0 .................................................       (334)        417        (505)     (1,706)     (4,320)

Loss on disposal, less applicable income tax expense of $0 ....       (698)         --          --          --          --
                                                                  --------    --------    --------    --------    --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM .......................     (4,114)      1,971      (4,969)     (4,242)    (11,533)


EXTRAORDINARY GAIN, NET OF TAXES OF $0 ........................        120          --       2,172          --          --
                                                                  --------    --------    --------    --------    --------
NET INCOME (LOSS) .............................................     (3,994)      1,971      (2,797)     (4,242)    (11,533)


Dividends on convertible Preferred Stock ......................        (55)        (82)        (31)         --          --
                                                                  --------    --------    --------    --------    --------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS .........   $ (4,049)   $  1,889    $ (2,828)   $ (4,242)   $(11,533)
                                                                  ========    ========    ========    ========    ========

BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations ......................   $  (0.88)   $   0.44    $  (1.46)   $  (0.96)   $  (3.18)
Discontinued operations:
   Income (loss) from operations ..............................      (0.09)       0.12       (0.16)      (0.64)      (1.91)
   Loss on disposal ...........................................      (0.20)         --          --          --          --

Extraordinary item ............................................       0.03          --        0.70          --          --
                                                                  --------    --------    --------    --------    --------
Net income (loss) .............................................   $  (1.14)   $   0.56    $  (0.92)   $  (1.60)   $  (5.09)
                                                                  ========    ========    ========    ========    ========

DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations ......................   $  (0.88)   $   0.40    $  (1.46)   $  (0.96)   $  (3.18)
Discontinued operations:
   Income (loss) from operations ..............................      (0.09)       0.11       (0.16)      (0.64)      (1.91)
   Loss on disposal ...........................................      (0.20)         --          --          --          --

Extraordinary item ............................................       0.03          --        0.70          --          --
                                                                  --------    --------    --------    --------    --------
Net income (loss) .............................................   $  (1.14)   $   0.51    $  (0.92)   $  (1.60)   $  (5.09)
                                                                  ========    ========    ========    ========    ========

BALANCE SHEET DATA:
Working capital (deficit) .....................................   $ (9,105)   $ (8,859)   $(12,657)   $(21,171)   $(16,342)
Total assets ..................................................     29,066      30,405      24,746      25,119      26,001
Long-term debt ................................................      2,253       2,704       2,712          24       5,077
Long-term debt including current maturities and debentures ....      2,256       2,706       2,758      12,026      17,900
Stockholders' deficit..........................................   $ (4,914)   $ (1,286)   $ (3,570)   $ (7,798)   $ (5,933)
</TABLE>



                                       12
<PAGE>   13
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.

         This Annual Report on Form 10-K includes forward-looking statements,
the realization of which may be impacted by certain important factors discussed
below under "Risk Factors -- Important Factors Related to Forward-Looking
Statements and Associated Risks".

GENERAL

         The following table summarizes the Company's financial data for the
fiscal years ended May 31, 1999 and 1998 (in thousands):

<TABLE>
<CAPTION>
                                                              CORPORATE          CONSOLIDATED
                                                              AND OTHER           CONTINUING         DISCONTINUED
1999                                      MANAGED CARE       OPERATIONS           OPERATIONS          OPERATIONS
--------------------------------------   -------------       ----------          ------------        ------------
<S>                                      <C>                 <C>                 <C>                 <C>
Operating revenues ...................     $37,691            $  1,338             $ 39,029             $ 4,187

Healthcare operating expenses ........      31,674                 578               32,252               3,082
General/administrative expenses              2,716               3,958                6,674                  16
Other operating expenses .............       2,622                 656                3,278               1,705
                                           -------            --------             --------             -------
                                            37,012               5,192               42,204               4,803
                                           -------            --------             --------             -------
   Operating income (loss) ...........     $   679            $ (3,854)            $ (3,175)            $  (616)
                                           =======            ========             ========             =======

1998
--------------------------------------

Operating revenues ...................     $38,360            $  1,427             $ 39,787             $ 6,276

Healthcare operating expenses ........      31,882                 873               32,755               5,658
General/administrative expenses              2,137               3,001                5,138                 145
Other operating expenses .............         511                 355                  866                  56
                                           -------            --------             --------             -------
                                            34,530               4,229               38,759               5,859
                                           -------            --------             --------             -------
   Operating income (loss) ...........     $ 3,830            $ (2,802)            $  1,028             $   417
                                           =======            ========             ========             =======
</TABLE>

           During Fiscal 1999, the Company's operating revenues from continuing
operations declined by 1.9%, or $0.8 million. Managed care operations accounted
for 87%, or $37.7 million of the Company's overall operating revenues, and 97%
of the Company's operating revenues from continuing operations.

RESULTS OF OPERATIONS - THE YEAR ENDED MAY 31, 1999, COMPARED TO THE YEAR ENDED
MAY 31, 1998.

           The Company reported a net loss from continuing operations of $3.0
million, which included approximately $0.9 million of bad debt expense specific
to two major contracts that terminated during Fiscal 1999, $0.3 million of bad
debt expense specific to hospital accounts receivable that were written off
after the March 11, 1999 disposal date, and $0.2 million of bad debt expense
specific to CCI contracts that were terminated prior to May 31, 1999.
Additionally, the Company incurred $0.8 million of expense in its unsuccessful
bid for a managed care contract in Argentina, and approximately $0.6 million of
restructuring costs related to the loss of the PCA contract in Puerto Rico.
These expenses were offset by an extraordinary gain of $0.1 million related to
the debenture exchange. This compares to net income of $1.5 million from
continuing operations for the same period of 1998, which included $1.3 million
of income relating to an adjustment made in the Company's estimated claims
payable reserve.

           Operating revenues from continuing operations decreased by 1.9% or
$0.8 million for the year ended May 31, 1999, compared to the year ended May 31,
1998. The decrease in operating revenues is attributable to decreases in
operating revenues of $0.7 million and $0.1 million for managed care and
corporate and other operations, respectively. Managed care revenues decreased
due to the loss of two major contracts during the fourth quarter of Fiscal 1999
(see Note 4 to the audited consolidated financial statements -- "Major
Customers/Contracts"). The decline in operating revenue from corporate and other
operations is primarily due to the cancellation or termination of several
unprofitable CCI contracts during Fiscal 1999.

           Healthcare operating expenses from continuing operations decreased by
$0.5 million for the year ended May 31, 1999, as compared to the year ended May
31, 1998. The decrease in healthcare operating expenses is primarily
attributable to the decrease in managed care and CCI revenues during Fiscal
1999. Healthcare operating


                                       13
<PAGE>   14
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES



expenses as a percentage of net revenues for managed care operations increased
slightly from 82.3% for the year ended May 31, 1998, to 82.6% for the year ended
May 31, 1999. This percentage increase is primarily attributable to the Fiscal
1998 fourth quarter reduction in the Company's accrued claims payable by $1.3
million, as a result of the Company changing its methodology from a method based
on authorizations to a traditional actuarial completion factor methodology (see
Note 12 to the audited consolidated financial statements -- "Accrued Claims
Payable").

           General and administrative expenses from continuing operations
increased by 29.9%, or $1.5 million, for the year ended May 31, 1999, as
compared to the year ended May 31, 1998. This increase is primarily due to
approximately $1.7 million of increased costs for professional and consulting
fees and other administrative costs, including $0.2 million attributable to one
legal settlement and $0.7 million of increased costs to manage the Company's
information systems. These increases were offset by savings over the prior year
of approximately $0.2 million, resulting from the restructuring that was
completed during the quarter ended February 28, 1998.

           Other operating costs from continuing operations increased by
approximately $2.4 million for the fiscal year ended May 31, 1999, compared to
the fiscal year ended May 31, 1998. This increase is directly attributable to
the $1.5 million of expense for the Company's provision for doubtful accounts, a
$0.3 million increase in depreciation expense and $0.6 million of restructuring
costs related to the loss of the Company's Puerto Rico contract.

           The Company is taking steps designed to increase revenues primarily
through its managed care operations and continued development of its behavioral
medicine products in criminal justice and other markets.

RESULTS OF OPERATIONS - YEAR ENDED MAY 31, 1998 COMPARED TO THE YEAR ENDED MAY
31, 1997

         The Company reported net income from continuing operations of
approximately $1.5 million for the year ended May 31, 1998, which included $1.3
million of income relating to an adjustment in the estimated claims payable
reserve during the fourth quarter of Fiscal 1998. Additionally, the Company
recognized approximately $0.4 million in income representing amounts collected
by the Company against the accounts receivable from closed facilities that was
previously written off. This is compared to a net loss from continuing
operations of $2.3 million reported for the year ended May 31, 1997. Included in
the results for Fiscal 1997 is a restructuring charge of $0.2 million, a legal
settlement of $0.3 million, and a $2.2 million extraordinary gain relating to
the Company's Exchange Offer of its Debentures.

         Operating revenues from continuing operations increased by 22% or $7.3
million for the year ended May 31, 1998 compared to the year ended May 31, 1997.
The increase in operating revenues is attributable to increases in operating
revenues of $10.1 million and $0.6 million for managed care and corporate
operations, that is offset by a $3.5 million decrease in revenues for contract
operations. Managed care revenues increased 36% due, in part, to new contracts
effective in Fiscal 1998.

         Healthcare operating expenses from continuing operations increased by
$4.8 million for the year ended May 31, 1998 as compared to the year ended May
31, 1997. The increase in healthcare operating expenses is primarily
attributable to an increase in managed care operating revenue. Healthcare
operating expenses as a percentage of net revenues for managed care operations
decreased from 89% for the year ended May 31, 1997 to 80% for the year ended May
31, 1998. This percentage decrease is primarily attributable to a change in
service mix as well as the Company's reduction of its accrued claims payable by
$1.3 million in the fourth quarter Fiscal 1998, as a result of the Company
changing its methodology from a method based on authorizations to a traditional
actuarial completion factor methodology (see Note 12 to the audited consolidated
financial statements -- "Accrued Claims Payable". The increase in healthcare
operating expenses for the managed care operations was partially offset by a
decline in healthcare operating expenses for contract operations.

         General and administrative expenses from continuing operations
decreased by 30%, or $2.2 million for the year ended May 31, 1998 as compared to
the year ended May 31, 1997. This reduction in expense reflects a decline in
corporate overhead spending due to a corporate restructuring.

         Other operating expenses from continuing operations declined by $0.2
million as a result of a decrease in the provision for doubtful accounts which
is primarily attributable to $0.4 million of amounts collected by the Company
against accounts receivable from closed facilities that were previously written
off. Interest expense decreased by 77%, or $0.6 million for the year ended May
31, 1998 compared to the year ended May 31, 1997 as a


                                       14
<PAGE>   15
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES



result of the Debenture Exchange in the third quarter of Fiscal 1997.
Additionally, the Fiscal 1997 results included a non-recurring $0.2 million
restructuring charge.

LIQUIDITY AND CAPITAL RESOURCES

         At May 31, 1999, the Company had unrestricted cash and cash equivalents
of $8.0 million. During the fiscal year ended May 31, 1999, the Company used
$1.1 million in its continuing operations and $1.9 million was provided by its
discontinued operations. Additionally, $1.1 million was provided by its
investing activities, and $0.2 million was provided by the Company's financing
activities. The Company reported a net loss of $3.0 million from continuing
operations for the fiscal year ended May 31, 1999, compared to income of $1.5
million from continuing operations for the fiscal year ended May 31, 1998. The
Company has an accumulated deficit of $56.6 million and total stockholders'
deficit of $4.9 million as of May 31, 1999. Additionally, the Company's current
assets at May 31, 1999, amounted to approximately $22.5 million and current
liabilities were approximately $31.6 million, resulting in a working capital
deficiency of approximately $9.1 million. The Company's primary use of available
cash resources is to expand its managed care business and fund operations.

         The Company's available sources of cash during the next fiscal year
will be derived from operations. In recent months, the Company has taken steps
necessary to reduce its operating costs by instituting staff reductions and cost
control measures. At this time, the Company cannot state with any degree of
certainty whether additional equity or debt financing will be available to it
and, if available, that the source of financing would be available on terms and
conditions acceptable to the Company. Any potential sources of additional
financing may be subject to business and economic conditions outside the
Company's control.

         The working capital and stockholders' deficits may raise doubt about
the Company's ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amount and classification of liabilities that may result from the outcome of
this uncertainty.

IMPACT OF YEAR 2000 COMPUTER ISSUES

         The Year 2000 problem exists because many computer programs were
designed and developed without considering the upcoming change in century.
Historically, certain computerized systems have been designed to have two-digit
rather than four-digit fields to define the applicable year and this could mean
that many computer programs are unable to distinguish between the year 1900 and
the year 2000 when a date of "00" is used for the applicable year. Potential
problems could exist for both information technology systems ("IT") and non-IT
systems. Non-IT systems typically include embedded technology, such as
micro-controllers, and may include equipment ranging from telephone switches and
fax machines to copy machines. Any failure to correct a Year 2000 problem could
result in an interruption in certain normal business activities or operations
due to errors or system failures.

         The Company has developed a compliance program ("Plan") using an
enterprise wide, phased approach for assessing, remediating or replacing,
testing, and implementing each of its mission-critical systems. The Plan covers
many diverse systems and components of systems and, as such, each system will be
treated separately in the Plan. Therefore, it will be possible for different
systems to be in different phases of the Plan at any point in time.
Additionally, since the Company's Plan addresses the Year 2000 problem from an
enterprise wide approach, the Plan covers both information technology ("IT")
systems and non-IT systems. The Plan also includes reviews of external vendors,
EDI exchange partners, and environmental infrastructure, including utilities and
security systems.

         The Company's compliance program includes an estimated completion date
of September 30, 1999, for all phases of its Plan for mission-critical systems.
The Company defines its mission-critical systems as its 1) clinical operating
system, 2) related database and EDI interchanges, 3) operations and facilities
systems (includes phone and communications network), and 4) accounting systems.

         The following chart shows the expected completion date for each phase
of the Company's Plan for its mission-critical systems:




                                       15
<PAGE>   16
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

                    EXPECTED COMPLETION - CALENDAR YEAR 1999


<TABLE>
<CAPTION>

        Phase 0            YEAR 2000 PROJECT OFFICE
        <S>                <C>                                                <C>
                           Initial Assessment of Critical Systems             Completed

                           Create Year 2000 Project Documents                 Completed

                           Build Vender Compliance Database                   Completed

                           Maintain Vendor Compliance Process                 Fourth Quarter

                           Year 2000 Project Management                       Fourth Quarter

        Phase 1            INVENTORY PHASE                                    Completed

        Phase 2            ASSESSMENT PHASE                                   Completed

        Phase 3            REMEDIATE/REPLACE PHASE                            Third Quarter

        Phase 4            TESTING PHASE                                      Third Quarter

        Phase 5            IMPLEMENTATION PHASE                               Third Quarter
</TABLE>

         The Company has completed implementation for all regional offices to
its new clinical operating system (TXEN). The system was purchased from Nichols
Research Corporation and has been certified Year 2000 compliant. The
implementation occurred ahead of the scheduled implementation date of September
30, 1999. The Company has also completed full remediation and testing of its
main financial and accounting system. The system has processed Fiscal 2000
information with no reported incidents. Additionally the Company has also
completed assessment of its mission critical systems, equipment and
infrastructure.

         The Company is continuing to address the potential impact of Year 2000
on its non-essential information systems, its other equipment that may be
affected by the Year 2000, and the impact of transacting business with parties
who do not have Year 2000 compliant systems. As of May 31, 1999, the Company has
completed mailing of its Year 2000 survey to all business partners,
manufacturers of the Company's non-essential business equipment, and other trade
vendors. The Company has also initiated the second phase to address these
non-essential information systems by mailing its `Second Notice' to all
companies that have not responded to the first mailing. The Company plans to
make telephone requests to any company that fails to respond to these written
requests for survey responses. To date, the Company has received replies from
only 17% of those companies surveyed and, as such, an expected completion date
for this correspondence cannot be determined as of May 31, 1999. The Company
cannot state with any certainty whether their suppliers, vendors and data
exchange partners will remain compliant even if they have stated compliance in
previous communications. Even though the Company will observe `On-going
Vigilance' for Year 2000 problems, they cannot ensure that their vendors,
providers, and manufacturers will be as vigilant.

         As of May 31, 1999, the Company has started a Contingency and
Continuity Business Resumption Plan program for all of its core business
functions in all regions. The Company will use newly created contingency plans
to reduce the risk of disruption of service on January 1, 2000. These processes
include the following, core business areas:

         -       Call Processing (Interactive/Call Distribution)
         -       Financial Processing (AP/AR/Claims)
         -       Membership/Eligibility/Authorizations
         -       Correspondence Processing (Authorization Mailers/EOB/EOP)
         -       Certification/Credentialing/ Eligibility
         -       Reporting
         -       Encounters
         -       Infrastructure Systems


                                       16
<PAGE>   17
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES



         During the fiscal year ended May 31, 1999, the Company recognized
approximately $0.1 million in expense specific to its Year 2000 compliance
program of which approximately 89% has been paid to consultants or vendors
providing services or equipment for the Company's compliance program.
Additionally, the Company paid approximately $0.3 million that was recorded as
capital expenditures during the fiscal year ended May 31, 1999, which includes
the costs for three of the clinical operating system conversions that were
planned for Fiscal 1999. The following chart provides a summary of the Company's
expected costs and actual expenditures to date related to its Year 2000 Plan.

<TABLE>
<CAPTION>
                                  TOTAL            ACTUAL COSTS           REMAINING
                                 EXPECTED           INCURRED AT           EXPECTED
                                  COSTS            MAY 31, 1999             COSTS
                                ----------         -------------         -----------
<S>                             <C>                <C>                   <C>
Capital expenditures            $  875,000         $    754,000          $   121,000
Operating expense ..               325,000              115,000              210,000
                                ----------         ------------          -----------
Total ..............            $1,200,000         $    869,000          $   331,000
                                ==========         ============          ===========
</TABLE>

         As of May 31, 1999, the Company has begun the development of its
contingency plan should it be unable to become compliant in a timely manner. At
this time, there can be no assurance that the Company will become Year 2000
compliant. As a result, the Company is unable to state with any certainty the
costs of becoming compliant. While the absolute costs cannot be determined at
this time, the Company does not expect such costs to exceed $1.2 million,
including any costs incurred for system implementations that may have been
accelerated due to Year 2000 issues.

         Should the Company be unable to become Year 2000 compliant, the problem
could result in an interruption in, or a failure of, certain normal business
activities or operations. Such failures could materially and adversely affect
the Company's results of operations, liquidity, and financial condition.


CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Except for historical
information, the matters discussed that may be considered forward-looking
statements may be subject to certain risks and uncertainties that could cause
the actual results to differ materially from those projected, including
uncertainties in the market, pricing, competition, procurement efficiencies,
uncertainties inherent in the Year 2000 problem, other matters discussed in this
annual report on Form 10-K, and other risks detailed from time to time in the
Company's SEC reports.


RISK FACTORS

IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

         This Annual Report on Form 10-K contains certain forward-looking
statements that are based on current expectations and involve a number of risks
and uncertainties. Factors that may materially affect revenues, expenses and
operating results include, without limitation, the Company's success in (i)
expanding the managed behavioral healthcare operations, (ii) effective
management in the delivery of services, (iii) risk and utilization in context of
capitated payouts, (iv) retaining certain refunds from the IRS (see Note 14 to
the audited consolidated financial statements -- "Income Taxes").

         Assumptions relating to the foregoing involve judgments that are
difficult to predict accurately and are subject to many factors that can
materially affect results. Budgeting and other management decisions are
subjective in many respects and thus susceptible to interpretations and periodic
revisions based on actual experience and business developments, the impact of
which may cause the Company to alter its budgets which may in turn affect the
Company's results. In light of the factors that can materially affect the
forward-looking information included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.


                                       17
<PAGE>   18
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES



CONCENTRATION OF RISK

         The Company currently has six contracts with one HMO to provide
behavioral healthcare services under commercial, Medicaid, and Medicare plans,
to contracted members in Florida and Texas. These combined contracts represent
approximately 17.4% and 18.3% of the Company's operating revenue from continuing
operations for Fiscal 1999 and 1998 respectively. The terms of each contract are
for one-year periods and are automatically renewable for additional one-year
periods unless terminated by either party. As of May 31, 1999, the Company
provides services to approximately 209,000 members in Florida and 4,000 members
in Texas from this HMO. The Company views its relationship with the HMO to be
satisfactory.

UNCERTAINTY OF FUTURE PROFITABILITY

         As of May 31, 1999, the Company had stockholders' deficit of $4.9
million and a working capital deficiency of approximately $9.1 million. The
Company had a net loss from continuing operations for the fiscal year ended May
31, 1999, of $3.0 million. There can be no assurance that the Company will be
able to achieve and sustain profitability or that the Company can achieve and
maintain positive cash flow on an ongoing basis. Present results of operations
are not necessarily indicative of anticipated future results of operations.

NEED FOR ADDITIONAL FUNDS; UNCERTAINTY OF FUTURE FUNDING

         During prior fiscal years, a principal source of liquidity has been the
private sale of equity securities and debt securities convertible into equity.
Issuance of additional equity securities by the Company could result in
substantial dilution to stockholders.

         The Company has received tax refunds for Fiscal 1996 and 1995 in the
amounts of $9.4 million and $5.4 million, respectively. Such refunds are based
on loss carrybacks under Section 172(f) of the Internal Revenue Code. Any IRS
claim for return of all or any portion thereof could have an adverse effect on
the Company's cash flows. On August 21, 1998, the Company received an
examination report from the IRS, dated August 6, 1998, related to its Section
172(f) carryback claims and amended tax returns for prior years, claiming taxes
due totaling approximately $12.4 million for which the Company has accrued $12.1
million as of May 31, 1999. The Company filed a protest with the IRS on November
6, 1998 to contest the examination report with the appeals office of the
Internal Revenue Service in Laguna Niguel, California. In the event that the
Company is unsuccessful in the appeal process, the Company is entitled to a
repayment of fees advanced to the Company's tax advisor relating to these refund
claims, totaling approximately $2.5 million. The IRS reserves the right to
assess and collect the tax previously refunded to the Company at any time during
the appeals process.

TAXES

         In connection with the filing of its Federal income tax returns for
fiscal years 1995 and 1996, the Company filed for a tentative refund to carry
back losses described in Section 172(f) of the IRC, requesting a refund to the
Company of $9.4 million and $5.5 million, respectively, of which refunds of $9.4
million and $5.4 million were received. In addition, the Company also filed
amended Federal income tax returns for fiscal years prior to 1995, requesting
similar refunds of losses carried back under Section 172(f) of $6.2 million for
1986; $0.4 million for 1985; $0.7 million for 1983; and $0.4 million for 1982, a
total of $7.7 million.

         During fiscal years 1997 and 1996, the Company recognized a portion of
the refunds received as a tax benefit of $0.3 million and $2.4 million,
respectively. The balance of the refunds received, $12.1 million, are recorded
as a deferred liability, "Unbenefitted tax refunds received" pending resolution
by the IRS of the appropriateness of the Section 172(f) carryback. The
additional refunds requested under Section 172(f) for prior years of $7.7
million have not been received, nor has the Company recognized any tax benefit
related to these potential refunds.

         Section 172(f) of the IRC provides for a ten-year net operating loss
carryback for specific losses attributable to (1) a product liability or (2) a
liability arising under a federal or state law or out of any tort if the act
giving rise to such liability occurs at least three years before the beginning
of the taxable year. The applicability of Section 172(f) to the type of business
in which the Company operates is unclear. No assurance can be provided that the
Company will be able to retain the refunds received to date or that the other
refunds requested will be received.



                                       18
<PAGE>   19
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES


         As a result of the Section 172(f) carryback claims filed by the
Company, and the tentative refunds received, the Company came under audit with
respect to the tax years previously mentioned.

         On August 21, 1998, the Company received an examination report, dated
August 6, 1998, from the IRS advising the Company that it was disallowing $12.4
million of the $14.8 million of refunds previously received, and the additional
refunds requested of $7.7 million. If the position of the IRS were to be upheld,
the Company would be required to repay $12.4 million in refunds previously
received, plus accrued interest of approximately $4.0 million through May 31,
1999. Accordingly, the Company would be entitled to a repayment of the fees
advanced to its tax advisor relating to these refund claims of approximately
$2.5 million of which $2.4 million is reported as "other receivable" in the
accompanying balance sheet. This report commences the administrative appeals
process. The Company filed a protest letter with the IRS on November 6, 1998 and
believes that its position with respect to its right to the tax refunds received
will be upheld. The Company's tax advisor relating to these refund claims has
advised management that the administrative appeals process could take twelve to
eighteen months. In the event the Company wishes to further protest the results
of its administrative appeal, it may further appeal to the United States Tax
Court following the final determination of the administrative appeal. The
Company has been advised that a determination by the United States Tax Court
could take up to an additional twelve months from commencement of the appeals
process in the United States Tax Court. The IRS reserves the right to assess and
collect the tax previously refunded to the Company at any time during the
appeals process.

UNCERTAINTY OF PRICING; HEALTHCARE REFORM AND RELATED MATTERS

         Managed care operations are at risk for costs incurred to supply
agreed upon levels of service. Failure to anticipate or control costs could have
material, adverse effects on the Company. Additionally, the business of
providing services on a full-risk capitation basis exposes the Company to the
additional risk that contracts negotiated and entered into may ultimately be
determined to be unprofitable if utilization levels require the Company to
deliver and provide services at capitation rates which do not account for or
factor in such utilization levels.

         The levels of revenues and profitability of healthcare companies may
be affected by the continuing efforts of governmental and third party payors to
contain or reduce the costs of healthcare through various means. In the United
States, there have been, and the Company expects that there will continue to be,
a number of federal and state proposals to implement governmental controls on
the price of healthcare. It is uncertain what legislative proposals will be
adopted or what actions federal, state or private payors for healthcare goods
and services may take in response to any healthcare reform proposals or
legislation. The Company cannot predict the effect healthcare reforms may have
on its business and no assurance can be given that any such reforms will not
have a material adverse effect on the Company.

DEPENDENCE ON KEY PERSONNEL

         The Company depends and will continue to depend upon the services of
its senior management and skilled personnel. In Fiscal 1998, the Company
relocated certain significant management functions to Tampa, Florida where
Comprehensive Behavioral Care, the Company's principal subsidiary, is located.

SHARES ELIGIBLE FOR FUTURE SALE

         The Company has issued or committed to issue 9,000 shares related to
the 7 1/2% convertible subordinated debentures due April 15, 2010, and options
or other rights to purchase approximately 1,160,000 shares. The Company may
contemplate issuing additional amounts of debt, equity or convertible securities
in public or private transactions for use in fulfilling its future capital needs
(see "Need for Additional Funds; Uncertainty of Future Funding"). Issuance of
additional equity could adversely affect the trading price of the Company's
Common Stock.

ANTI-TAKEOVER PROVISIONS

         The Company's Restated Certificate of Incorporation provides for
60,000 authorized shares of Preferred Stock, the rights, preferences,
qualifications, limitations and restrictions of which may be fixed by the Board
of Directors without any vote or action by the stockholders that could have the
effect of diluting the Common Stock or reducing working capital that would
otherwise be available to the Company. As of May 31, 1999, there are no
outstanding shares of Preferred Stock (see Note 18 to the audited consolidated
financial statements -- "Preferred Stock, Common Stock, and Stock Option
Plans"). The Company's Restated Certificate of Incorporation also provides for
a classified board of directors with directors divided into three classes
serving staggered terms. The Company's

                                       19
<PAGE>   20
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES


stock option plans generally provide for the acceleration of vesting of options
granted under such plans in the event of certain transactions which result in a
change of control of the Company. Section 203 of the General Corporation Law of
Delaware prohibits the Company from engaging in certain business combinations
with interested stockholders. In addition, each share of the Company's Common
Stock includes one right on the terms and subject to the conditions of the
Rights Agreement between the Company and Continental Stock Transfer & Trust
Company. These provisions may have the effect of delaying or preventing a change
in control of the Company without action by the stockholders and therefore could
adversely affect the price of the Company's Common Stock or the possibility of
sale of shares to an acquiring person.

LIMITATIONS ON THE DEDUCTIBILITY OF COMPENSATION UNDER CERTAIN CIRCUMSTANCES

         Pursuant to the 1993 Omnibus Budget Reconciliation Act, a portion of
annual compensation payable after 1993 to any of the Company's five highest paid
executive officers would not be deductible by the Company for federal income tax
purposes to the extent such officers' overall compensation exceeds $1.0 million
per executive officer. Qualifying performance-based incentive compensation,
however, would be both deductible and excluded for purposes of calculating the
$1.0 million base. The Board of Directors has determined that no portion of
anticipated compensation payable to any executive officer in 1999 would be
non-deductible.



                                       20
<PAGE>   21
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

                 Index to Consolidated Financial Statements and
                          Financial Statement Schedules

                     Years Ended May 31, 1999, 1998 and 1997

<TABLE>
<S>                                                                                                           <C>
Report of Richard A. Eisner & Company, LLP.......................................................................22
Report of Ernst & Young, LLP.....................................................................................23
Consolidated Balance Sheets, May 31, 1999 and 1998...............................................................24
Consolidated Statements of Operations, Years Ended May 31, 1999, 1998 and 1997...................................25
Consolidated Statements of Stockholders' Deficit, Years Ended May 31, 1999, 1998 and 1997........................26
Consolidated Statements of Cash Flows, Years Ended May 31, 1999, 1998 and 1997...................................27
Notes to Consolidated Financial Statements, Years Ended May 31, 1999, 1998 and 1997...........................28-45
</TABLE>












                                       21
<PAGE>   22
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES



INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders of
Comprehensive Care Corporation

         We have audited the accompanying consolidated balance sheet of
Comprehensive Care Corporation and subsidiaries as of May 31, 1999 and the
related consolidated statements of operations, stockholders' deficit and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

         We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Comprehensive Care Corporation and subsidiaries as of May 31, 1999, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles.

         As discussed in Note 3, the Company's working capital deficiency and
stockholders' deficit raise substantial doubt about its ability to continue as
a going concern. Management's plans as to these matters are also described in
Notes 3 and 14. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.




/s/ Richard A. Eisner & Company, LLP
New York, New York
August 13, 1999





                                       22
<PAGE>   23
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES


REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors and Stockholders of
Comprehensive Care Corporation

         We have audited the accompanying consolidated balance sheet of
Comprehensive Care Corporation and subsidiaries as of May 31, 1998, and the
related consolidated statements of operations, stockholders' deficit and cash
flows for each of the two years in the period ended May 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

         We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

         In our opinion the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Comprehensive Care Corporation and subsidiaries as of May 31, 1998, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended May 31, 1998, in conformity with generally
accepted accounting principles.

         As discussed in Note 3, the Company's net working capital deficiency
and stockholders' deficit raise substantial doubt about its ability to continue
as a going concern. Management's plans as to these matters are also described in
Note 3. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

         As more fully described in Note 12, the Company changed its method of
estimating its claim liability in 1998, which has been accounted for as a change
in accounting principle inseparable from a change in estimate.




/s/ Ernst & Young LLP
Tampa, Florida
August 26, 1998


                                       23
<PAGE>   24
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES


                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                    MAY 31,
                                                                                           1999                 1998
                                                                                         --------             --------
                                                                                             (Amounts in Thousands)
<S>                                                                                      <C>                  <C>
ASSETS
Current assets:
   Cash and cash equivalents ................................................            $  8,026             $  6,016
   Accounts receivable, less allowance for doubtful accounts of $923 and
     $893 ...................................................................                 932                3,280
   Accounts receivable - pharmacy and laboratory costs ......................              10,469                5,655

   Other receivable .........................................................               2,415                2,415
   Other current assets .....................................................                 614                  555
                                                                                         --------             --------
Total current assets ........................................................              22,456               17,921
                                                                                         --------             --------

Property and equipment ......................................................               4,296               11,416
Less accumulated depreciation and amortization ..............................              (2,326)              (4,373)
                                                                                         --------             --------
Net property and equipment ..................................................               1,970                7,043
                                                                                         --------             --------

Non-current assets:
   Property and equipment held for sale .....................................                  --                1,910
   Notes receivable .........................................................               1,172                   94
   Goodwill, net ............................................................               1,080                1,187
   Restricted cash ..........................................................               1,923                1,848
   Other assets .............................................................                 465                  402
                                                                                         --------             --------
Total non-current assets ....................................................               4,640                5,441
                                                                                         --------             --------
Total assets ................................................................            $ 29,066             $ 30,405
                                                                                         ========             ========

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
   Accounts payable and accrued liabilities .................................            $  4,552             $  5,789
   Accrued claims payable ...................................................               4,369                4,846
   Accrued pharmacy and laboratory costs payable ............................              10,469                5,655
   Current maturities of long-term debt .....................................                   3                    2
   Unbenefitted tax refunds received ........................................              12,092               12,092
   Income taxes payable .....................................................                  76                  306
                                                                                         --------             --------
Total current liabilities ...................................................              31,561               28,690
                                                                                         --------             --------

Long-term liabilities:
   Long-term debt, excluding current maturities .............................               2,253                2,704
   Other liabilities ........................................................                 166                  297
                                                                                         --------             --------
Total long-term liabilities .................................................               2,419                3,001
                                                                                         --------             --------
Total liabilities ...........................................................              33,980               31,691
                                                                                         --------             --------
Commitments and Contingencies (see Note 4 and Note 19)
Stockholders' deficit:
   Preferred stock, $50.00 par value; authorized 60,000 shares; issued and
   outstanding 0 and 41,260 shares of Series A non-Voting 4% Cumulative
   Convertible Preferred Stock at redemption value ..........................                  --                2,176
   Common stock, $0.01 par value; authorized 12,500,000 shares; issued
   and outstanding 3,817,812 and 3,415,402 ..................................                  38                   34
   Additional paid-in-capital ...............................................              51,794               49,201
   Accumulated deficit ......................................................             (56,746)             (52,697)
                                                                                         --------             --------
Total stockholders' deficit .................................................              (4,914)              (1,286)
                                                                                         --------             --------
Total liabilities and stockholders' deficit .................................            $ 29,066             $ 30,405
                                                                                         ========             ========
</TABLE>

                             See accompanying notes.



                                       24
<PAGE>   25
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES



                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                                              YEAR ENDED MAY 31,
                                                                               1999                 1998              1997
                                                                              --------           --------           --------
                                                                              (Amounts in thousands, except per share data)

<S>                                                                           <C>                <C>                <C>
 OPERATING REVENUES ..................................................        $ 39,029           $ 39,787           $ 32,531

 COSTS AND EXPENSES:
   Healthcare operating expenses .....................................          32,252             32,755             27,996
   General and administrative expenses ...............................           6,674              5,138              7,383
   Provision for doubtful accounts ...................................           1,641                 94                228
   Depreciation and amortization .....................................           1,037                772                685
   Restructuring expenses ............................................             600                 --                195
                                                                              --------           --------           --------
                                                                                42,204             38,759             36,487
                                                                              --------           --------           --------
 OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS
      BEFORE ITEMS SHOWN BELOW .......................................          (3,175)             1,028             (3,956)

 OTHER INCOME (EXPENSE):
   Gain on sale of assets ............................................               2                314                 47
   Loss on sale of assets ............................................              (4)                (9)               (33)
   Non-operating gain (loss) .........................................             (79)                50               (390)
   Interest income ...................................................             309                406                259
   Interest expense ..................................................            (281)              (172)              (732)
                                                                              --------           --------           --------
 INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ........          (3,228)             1,617             (4,805)
 Income tax expense (benefit) ........................................            (146)                63               (341)
                                                                              --------           --------           --------
 INCOME (LOSS) FROM CONTINUING OPERATIONS ............................          (3,082)             1,554             (4,464)

 DISCONTINUED OPERATIONS:
 Income (loss) from operations, less applicable tax expense
   (benefit) of $0 ...................................................            (334)               417               (505)
 Loss on disposal, including operating loss of $282 through disposal
   date, less applicable income tax benefit of $0 ....................            (698)                --                 --
                                                                              --------           --------           --------
 INCOME (LOSS) BEFORE EXTRAORDINARY GAIN .............................          (4,114)             1,971             (4,969)
 EXTRAORDINARY GAIN NET OF TAXES OF $0 ...............................             120                 --              2,172
                                                                              --------           --------           --------
 NET INCOME (LOSS) ...................................................          (3,994)             1,971             (2,797)

 Dividends on convertible Preferred Stock ............................             (55)               (82)               (31)
                                                                              --------           --------           --------

 NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS ...............        $ (4,049)          $  1,889           $ (2,828)
                                                                              ========           ========           ========

 BASIC EARNINGS PER SHARE:
 Income (loss) from continuing operations ............................        $  (0.88)          $   0.44           $  (1.46)
 Discontinued operations:
   Income (loss) from operations .....................................           (0.09)              0.12              (0.16)
   Loss on disposal ..................................................           (0.20)                --                 --
 Extraordinary item ..................................................            0.03                 --               0.70
                                                                              --------           --------           --------
 Net income (loss) ...................................................        $  (1.14)          $   0.56           $  (0.92)
                                                                              ========           ========           ========

 DILUTED EARNINGS PER SHARE:
 Income (loss) from continuing operations ............................        $  (0.88)          $   0.40           $  (1.46)
 Discontinued operations:
   Income (loss) from operations .....................................           (0.09)              0.11              (0.16)
   Loss on disposal ..................................................           (0.20)                --                 --
 Extraordinary item ..................................................            0.03                 --               0.70
                                                                              --------           --------           --------
 Net income (loss) ...................................................        $  (1.14)          $   0.51           $  (0.92)
                                                                              ========           ========           ========
</TABLE>

                             See accompanying notes


                                       25
<PAGE>   26
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES


                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                     ADDITIONAL
                                                          PREFERRED STOCK         COMMON STOCK        PAID-IN        ACCUMULATED
                                                       SHARES       AMOUNT     SHARES       AMOUNT    CAPITAL          DEFICIT
                                                      --------     --------    -------     -------   ----------      -----------
<S>                                                   <C>         <C>          <C>         <C>       <C>             <C>
BALANCE, MAY 31, 1996 ............................       --       $    --        2,949       $29      $ 43,931       $(51,758)

   Net loss ......................................       --            --           --        --            --         (2,797)
   Issuance of shares for the purchase of HMS ....       --            --           16        --           120             --
   Shares issued for debenture exchange offer ....       --            --          164         2         1,888             --
   Shares issued for secured note conversion .....       41         2,063           --        --            --             --
   Exercise of stock options .....................       --            --          210         2         1,521             --
   Share issued for conversion of subsidiary stock       --            --          100         1           999             --
   Retirement of common stock ....................       --            --          (11)       --          (159)            --
   Dividends on preferred stock ..................       --            31           --        --            --            (31)
   Vesting of restricted shares ..................       --            --           --        --           588             --
                                                        ---       -------       ------       ---      --------       --------
BALANCE, MAY 31, 1997 ............................       41       $ 2,094        3,428       $34      $ 48,888       $(54,586)

   Net income ....................................       --            --           --        --            --          1,971
   Adjust shares issued for the HMS acquisition ..       --            --           (6)       --          (138)            --
   Exercise of stock options .....................       --            --           44        --           451             --
   Dividends on preferred stock ..................       --            82           --        --            --            (82)
   Cancellation of CEO restricted grant ..........       --            --          (51)       --            --             --
                                                        ---       -------       ------       ---      --------       --------
BALANCE, MAY 31, 1998 ............................       41       $ 2,176        3,415       $34      $ 49,201       $(52,697)

   Net loss ......................................       --            --           --        --            --         (3,994)
   Adjust shares issued for the HMS acquisition ..       --            --           --        --           (94)            --
   Exercise of stock options .....................       --            --           22        --           155             --
   Dividends on preferred stock ..................                     55                                                 (55)
Shares issued for preferred stock conversion ..         (41)       (2,231)         344         4         2,227              0
   Shares issued for debenture exchange offer ....       --            --           37        --           305             --
                                                        ---       -------       ------       ---      --------       --------
BALANCE, MAY 31, 1999 ............................       --       $    --        3,818       $38      $ 51,794       $(56,746)
                                                        ===       =======       ======       ===      ========       ========

<CAPTION>
                                                              TOTAL
                                                          STOCKHOLDER'S
                                                             DEFICIT
                                                          -------------
<S>                                                       <C>
BALANCE, MAY 31, 1996 ............................           $(7,798)

   Net loss ......................................            (2,797)
   Issuance of shares for the purchase of HMS ....               120
   Shares issued for debenture exchange offer ....             1,890
   Shares issued for secured note conversion .....             2,063
   Exercise of stock options .....................             1,523
   Share issued for conversion of subsidiary stock             1,000
   Retirement of common stock ....................              (159)
   Dividends on preferred stock ..................                --
   Vesting of restricted shares ..................               588
                                                             -------
BALANCE, MAY 31, 1997 ............................           $(3,570)

   Net Income ....................................             1,971
   Adjust shares issued for the HMS acquisition ..              (138)
   Exercise of stock options .....................               451
   Dividends on preferred stock ..................                --
   Cancellation of CEO restricted grant ..........                --
                                                             -------
BALANCE, MAY 31, 1998 ............................           $(1,286)

   Net loss ......................................            (3,994)
   Adjust shares issued for the HMS acquisition ..               (94)
   Exercise of stock options .....................               155
   Dividends on preferred stock ..................
   Shares issued for preferred stock conversion ..                --
   Shares issued for debenture exchange offer ....               305
                                                             -------
BALANCE, MAY 31, 1999 ............................           $(4,914)
                                                             =======
</TABLE>

                             See accompanying notes.



                                       26
<PAGE>   27
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES


                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                          YEAR ENDED MAY 31,
                                                                                 1999           1998          1997
                                                                                --------       -------       --------
                                                                                        (Amounts in thousands)
<S>                                                                              <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations before extraordinary item ........      $(3,082)      $ 1,554       $(4,464)
Adjustments to reconcile (loss) income to net cash (used in) provided by
 operating activities:
   Depreciation and amortization ..........................................        1,037           772           685
   Asset write-down .......................................................          146            --            --
   Provision for doubtful accounts ........................................        1,641            94           228
   Adjustment to deferred costs ...........................................           --           101            --
   Gain on sale of assets .................................................           (2)         (314)          (47)
   Loss on sale of assets .................................................            4             9            33
   Vesting of restricted shares ...........................................           --            --           588
   Restructuring expenses .................................................          455            --           195
   Goodwill impairment ....................................................           27            --            --
CHANGES IN ASSETS AND LIABILITIES:
   Accounts receivable ....................................................         (174)         (749)         (605)
   Accounts receivable - pharmacy and laboratory costs ....................       (4,814)       (5,655)           --
   Notes and other receivables ............................................           --            --           134
   Other current assets, restricted funds, and other non-current assets ...         (184)       (1,670)       (1,660)
   Accounts payable and accrued liabilities ...............................         (379)          (45)       (2,383)
   Accrued claims payable .................................................         (477)       (1,284)        3,452
   Accrued pharmacy and laboratory costs payable ..........................        4,814         5,655            --
   Unbenefitted tax refunds received ......................................           --            --         5,074
   Income taxes payable ...................................................         (109)          (50)          (40)
   Other liabilities ......................................................          (31)          (71)           14
                                                                                 -------       -------       -------
   Net cash (used in) provided by continuing operations ...................       (1,128)       (1,653)        1,204
                                                                                 -------       -------       -------

   Net cash used in discontinued operations ...............................       (1,070)         (214)          (59)
                                                                                 -------       -------       -------
   NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ....................       (2,198)       (1,867)        1,145
                                                                                 -------       -------       -------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net proceeds from sale of hospital property and equipment related to
     discontinued operations ..............................................        4,820         3,072         1,557

   Payment received on note for sale of property and equipment ............           --         1,941            --
   Additions to property and equipment ....................................         (768)       (1,413)         (502)
                                                                                 -------       -------       -------
   Net cash provided by investing activities ..............................        4,052         3,600         1,055
                                                                                 -------       -------       -------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from the issuance of Common Stock .............................          158           358         1,523
   Repayment of debt ......................................................           (2)          (66)       (4,165)
                                                                                 -------       -------       -------
   NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ....................          156           292        (2,642)
                                                                                 -------       -------       -------
Net increase (decrease) in cash and cash equivalents ......................        2,010         2,025          (442)
Cash and cash equivalents at beginning of year ............................        6,016         3,991         4,433
                                                                                 -------       -------       -------
CASH AND CASH EQUIVALENTS AT END OF YEAR ..................................      $ 8,026       $ 6,016       $ 3,991
                                                                                 =======       =======       =======

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Cash paid during the year for
        Interest ..........................................................      $   180       $   207       $ 1,327
                                                                                 =======       =======       =======
        Income taxes ......................................................      $    87       $    34       $    54
                                                                                 =======       =======       =======
</TABLE>

                             See accompanying notes


                                       27


<PAGE>   28
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           May 31, 1999, 1998 and 1997

NOTE 1 -- DESCRIPTION OF THE COMPANY'S BUSINESS

     Comprehensive Care Corporation(R) (the "Company") is a Delaware Corporation
organized in 1969. Unless the context otherwise requires, all references to the
"Company" include Comprehensive Behavioral Care, Inc.(SM(1)) ("CompCare"(SM(2))
or "CBC") and subsidiary corporations. The Company, through its wholly owned
subsidiary, CompCare, primarily provides managed care services in the behavioral
health and psychiatric fields which represented approximately 97% of its
revenues from continuing operations in fiscal year 1999. The managed care
operations include administrative service agreements, fee-for-service
agreements, and capitation contracts. The customer base for its services
includes both corporate and governmental entities. The Company's services are
provided by employees or by unrelated vendors on a subcontract or subcapitated
basis.

     During Fiscal 1999, the Company disposed of its hospital business segment.


NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Reporting Entity and Basis of Presentation

     The consolidated financial statements include the accounts of Comprehensive
Care Corporation and its wholly owned subsidiaries. Significant inter-company
accounts and transactions have been eliminated in consolidation. The results of
operations of the hospital business segment are shown in discontinued
operations, with prior years restated, in the accompanying statements of
operations.

RECLASSIFICATION

         Certain amounts for 1998 and 1997 have been reclassified to conform to
the 1999 presentation. These reclassifications had no effect on the previously
reported results of operations or stockholders' deficit.

USE OF ESTIMATES

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.

REVENUE RECOGNITION

         The Company's managed care activities are performed under the terms of
agreements with HMOs, PPOs and other payors to provide contracted medical
services to subscribing participants. Under these agreements, revenue arises
from agreements to provide contracted services to qualified beneficiaries and is
earned monthly based on the number of qualified participants regardless of
services actually provided (generally referred to as capitation arrangements).
The Company has certain capitation arrangements whereby a portion of the monthly
capitation amount is withheld for certain performance guarantees. Noncompliance
by the Company with respect to the performance guarantees could result in the
forfeiture, in whole or in part, of such withholds. The Company's revenues from
providing other behavioral healthcare services are earned on a fee-for-service
basis and are recognized as services are rendered.

HEALTHCARE EXPENSE RECOGNITION

         The Company attempts to control its costs and risk by entering into
contractual relationships with healthcare providers including hospitals,
physician groups and other managed care organizations either on a sub-capitated,
a discounted fee-for-services, or a per-case basis. The Company's capitation
contracts typically exclude risk for chronic care patients. The cost of
healthcare services is recognized in the period that the Company is obligated to
provide such services. Certain contracted healthcare providers assume the
financial risk for participant care rendered by them and they are compensated on
a sub-capitated basis.



                                       28
<PAGE>   29
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           May 31, 1999, 1998 and 1997


         In cases where the Company retains the financial responsibility for
authorizations, hospital utilization, and the cost of other behavioral
healthcare services, the Company establishes an accrual for estimated claims
payable (see Note 12 -- "Accrued Claims Payable").

PREMIUM DEFICIENCIES

         Estimated future healthcare costs and expenses in excess of estimated
future premiums are recorded as a loss when determinable. No such deficiencies
existed at May 31, 1999 or May 31, 1998.

CASH AND CASH EQUIVALENTS

         Cash in excess of daily requirements is invested in short-term
investments with original maturities of three months or less. These investments
aggregated $7.7 million and $4.0 million at May 31, 1999 and 1998, respectively.
These investments are included in cash equivalents in the accompanying
consolidated balance sheets.

RESTRICTED CASH

         These restricted accounts are required under capitated contracts,
primarily the Puerto Rico contract that expired March 31, 1999 (see Note 4 --
"Major Contracts/Customers").

PROPERTY AND EQUIPMENT

         Property and equipment are recorded at cost and include improvements
that significantly add to the productive capacity or extend the useful lives of
the assets. Costs of maintenance and repairs are charged to expense as incurred.
The costs of major remodeling and improvements are capitalized as leasehold
improvements.

         Depreciation and amortization of property and equipment are computed
using the straight-line method over the estimated useful lives of the related
assets, principally: buildings and improvements -- 5 to 40 years; furniture and
equipment -- 3 to 12 years.

PROPERTY AND EQUIPMENT HELD FOR SALE

         Losses on facilities sold have been reflected in the consolidated
statements of operations. Gains on facilities sold have either been deferred if
conditions for current recognition have not been met or have been reflected in
the consolidated statements of operations. Any impairments to the net realizable
value of property and equipment held for sale have also been recorded in the
consolidated statements of operations.

         Property and equipment held for sale at May 31, 1998 represented net
assets of one hospital facility that the Company sold during Fiscal 1999. The
carrying value as of May 31, 1998 equaled the estimated net realizable value for
this property.

GOODWILL

         Goodwill includes costs in excess of the fair value of net assets of
businesses purchased. Costs in excess of net assets purchased are amortized on a
straight-line basis up to 21 years. The Company evaluates the recoverability and
the amortization period of goodwill by determining whether the amount of
goodwill recorded can be recovered through undiscounted cash flows of the
business acquired excluding interest expense and amortization over the remaining
amortization period. The Company believes that the remaining $1.1 million of net
recorded goodwill at May 31, 1999, is recoverable from future estimated
undiscounted cash flows. The amounts of goodwill reported in the consolidated
balance sheets are net of accumulated amortization of goodwill of $351,000 and
$325,000 at May 31, 1999, and 1998, respectively.

ACCRUED CLAIMS PAYABLE

         The accrued claims payable liability represents the estimated ultimate
net amounts owed for all behavioral healthcare services provided through the
respective balance sheet dates.



                                       29
<PAGE>   30
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           May 31, 1999, 1998 and 1997


         The unpaid claims liability is estimated using an actuarial paid
completion factor methodology and other statistical analyses. These estimates
are subject to the effects of trends in utilization and other factors. Although
considerable variability is inherent in such estimates, management believes that
the unpaid claims liability is adequate. The estimates are continually reviewed
and adjusted as experience develops or new information becomes known with
adjustments included in current operations.

INCOME TAXES

         The Company calculates deferred taxes and related income tax expense
using the liability method. This method determines deferred taxes by applying
the current tax rate to the cumulative temporary differences between the
recorded carrying amounts and the corresponding tax basis of assets and
liabilities. A valuation allowance is established for deferred tax assets unless
their realization is considered more likely than not. The Company's provision
for income taxes is the sum of the change in the balance of deferred taxes
between the beginning and the end of the period and income taxes currently
payable or receivable.

STOCK OPTIONS

         The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No.123,
"Accounting for Stock-based Compensation" requires the use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, in the event that the exercise price of the Company's employee stock
options is less than the market price of the underlying stock on the date of
grant, compensation expense is recognized. However, total compensation expense
recognized in 1998 was $83,000 for taxes paid on behalf of employees in
connection with stock options exercised.

EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENT

         In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.128, "Earnings per Share", which the Company
adopted in the quarter ending February 28, 1998. Statement 128 replaced the
previously reported primary and fully diluted earnings per share. Unlike
primary earnings per share, basic earnings per share exclude any dilutive
effects of options, warrants, and convertible securities. Diluted earnings per
share are very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented to
conform to the Statement 128 requirements (see Note 16 -- "Earnings Per
Share").

         In calculating basic earnings (loss) per share, net income (loss)
adjusted for dividends on preferred stock, is divided by the weighted average
number of common shares outstanding for the period. Diluted earnings per share
reflect the assumed conversion of all dilutive securities, such as options and
convertible preferred stock. No such exercise or conversion is assumed where
the effect is antidilutive, such as when there is a loss from continuing
operations.

FAIR VALUE OF FINANCIAL INSTRUMENTS

         FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments" requires disclosure of fair value information about financial
instruments whether or not recognized in the balance sheet for which it is
practical to estimate that value.

         For cash and cash equivalents, notes receivable, and restricted cash,
the carrying amount approximates fair value. For long-term debt, the fair value
is based on the estimated market price for the Debentures on the last day of the
fiscal year.


                                       30
<PAGE>   31
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           May 31, 1999, 1998 and 1997



         The carrying amounts and fair values of the Company's financial
instruments at May 31, 1999, and 1998, are as follows:

<TABLE>
<CAPTION>
                                                                             1999                   1998
                                                                     CARRYING     FAIR       CARRYING    FAIR
                                                                      AMOUNT      VALUE       AMOUNT     VALUE
                                                                     --------     -----      --------    -----
                                                                                  (AMOUNTS IN THOUSANDS)
         <S>                                                         <C>        <C>          <C>        <C>
         Assets
         Cash and cash equivalents............................       $ 8,026    $ 8,026      $ 6,016    $ 6,016
         Notes receivable.....................................         1,198      1,198           94         94
         Restricted cash......................................         1,923      1,923        1,848      1,848

         Liabilities
         Long-term debt.......................................       $ 2,244    $ 1,346      $ 2,692    $ 1,615
</TABLE>

SEGMENT INFORMATION

         During the fourth quarter of Fiscal 1998, the Company adopted Statement
of Financial Accounting Standards No. 131, "Disclosure About Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 establishes standards
for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial statements. SFAS 131 also establishes standards for related
disclosures about products and services and geographic areas. Operating segments
are defined as components of an enterprise about which separate financial
information is available, that is evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and in assessing
performance. The Company has evaluated the effects of this pronouncement and
determined that its only operating segment relating to continuing operations is
the managed care business.


NOTE 3 -- LIQUIDITY AND CAPITAL RESOURCES

        For the year ended May 31, 1999, the Company incurred a loss from
continuing operations of $3.0 million and, as of May 31, 1999, the Company had a
working capital deficiency of approximately $9.1 million and a stockholders'
deficit of approximately $4.9 million. For the years ended May 31, 1999 and
1998, continuing operations used cash of approximately $1.1 million and $1.6
million, respectively. In addition a contract that generated approximately 44%
of operating revenues from continuing operations during Fiscal 1999 expired in
March 1999 and was not renewed (see Note 4 -- "Major Customers/Contracts"). The
working capital deficiency referred to above results from a $12.1 million
liability related to Federal income tax refunds received in prior years. The
ultimate outcome of the Internal Revenue Service audit whereby it is seeking
recovery of the refunds from the Company, including the amount to be repaid, if
any, and the timing thereof, is not determinable (see Note 14 -- "Income
Taxes").

         The Company cannot state with any degree of certainty whether any
required additional equity or debt financing to meet its obligations will be
available to it during Fiscal 2000 and, if available, that the source of
financing would be available on terms and conditions acceptable to the Company.

         The above conditions raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments that may result from the outcome of
this uncertainty.

         During Fiscal 1999, management has taken steps to trim costs and save
cash, including making significant staff reductions and disposing of the
Company's hospital business segment. This has allowed the Company to direct its
available resources toward the managed care business that is its chief focus.
The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing as may be required and, ultimately, to attain
profitability.


NOTE 4 -- "MAJOR CONTRACTS/CUSTOMERS

         During Fiscal 1999, the Company provided services to members of Humana
Health Plans of Puerto Rico, Inc. ("Humana of Puerto Rico") (successor in
interest to PCA Health Plans of Puerto Rico, Inc.) under the terms of management
service agreements entered into pursuant to health care contracts awarded to
Humana of Puerto Rico by the Puerto Rico Insurance Administration. These
contracts expired on March 31, 1999, with an extension period that ended April
30, 1999. For the fiscal year ended May 31, 1999, these agreements account for
approximately 44%, or $17.1 million, of the Company's operating revenues from
continuing operations.




                                       31
<PAGE>   32
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           May 31, 1999, 1998 and 1997


        Additionally, the contract with Humana established an amount that was
withheld from Humana's monthly remittances to the Company to cover pharmacy and
laboratory costs that are the financial responsibility of the Company, but were
administered by Humana. Because of the uncertainty surrounding the determination
of the actual pharmacy and laboratory costs incurred, the Company has reported
the contract at a 100% loss ratio for the contract to date pending clarification
of the actual costs incurred. For the fiscal years ended May 31, 1999 and May
31, 1998, respectively, the Company reported $4.8 million and $5.7 million of
revenue with a corresponding amount as claims expense in the accompanying
statement of operations with respect to pharmacy and laboratory costs under the
contract. Additionally, the Company has reported $10.5 million and $5.7 million
as accounts receivable and accrued claims payable in the accompanying balance
sheet at May 31, 1999 and May 31, 1998, respectively. During Fiscal 1999, Humana
sent written notice to the Company that the Company owed $3.0 million to Humana
in connection with these pharmacy and laboratory costs. The Company has
expressed to Humana its total disagreement with Humana's position. The Company
believes that Humana owes the Company in excess of $3.0 million in relation to
this same issue. Efforts are being made to work with Humana to resolve the
uncertainty.

              The Company also has contracts with Humana Health Plans ("Humana")
under which it provides services to members in Florida and Texas. Inclusive of
the Humana of Puerto Rico contracts, Humana contracts account for approximately
62%, or $24.4 million, of the Company's operating revenues from continuing
operations for the fiscal year ended May 31, 1999. For the fiscal years ended
May 31, 1998 and 1997, these contracts accounted for approximately 66% and 39%,
respectively, of the Company's operating revenues from continuing operations.
As of May 31, 1999, the Company provides services to approximately 213,000
members that are covered under the Humana plans in Florida and Texas.

NOTE 5 -- ACQUISITIONS AND DISPOSITIONS

         On March 11, 1999, the Company sold its Aurora, Colorado hospital for
$3.3 million of cash plus a $1.2 million note receivable (see Note 10 -- "Notes
Receivable"). The Company recognized a $0.4 million loss on the sale of this
facility. The sale of its Aurora facility completed the Company's plan of
disposition for its hospital business segment (see Note 15 -- "Discontinued
Operations").

         On July 25, 1996, the Company consented to closing the acquisition of
Healthcare Management Services, Inc., Healthcare Management Services of Ohio,
Inc., Healthcare Management Services of Michigan, Inc. and Behavioral Healthcare
Management, Inc. (hereafter collectively referred to as "HMS"). The Company
consented to the closing, reserving its rights to assert certain claims against
the former owners (the "Sellers") and others (see Note 19 -- "Commitments and
Contingencies"). HMS contracts with commercial and governmental agencies to
provide managed behavioral healthcare programs to patients in Michigan and Ohio.
Additionally, HMS provides the following on a contract basis: case management
(pre-certification, concurrent review, quality assurance, retrospective chart
reviews, peer review and clinical audits as requested by their clients), claims
review, network development, credentialing and management of clinical services
for hospitals and community providers. The Company recorded the acquisition
using the purchase method of accounting. In conjunction with this acquisition,
the Company issued a net of 10,000 shares of its Common Stock after giving
effect to a settlement with one of the principals in the HMS transaction. The
Company's consolidated financial statement for the fiscal year ended May 31,
1997 reflects the results of operations for HMS for the period from July 25,
1996 through May 31, 1997. The unaudited pro forma information below presents
the combined results of operations as if the HMS acquisition has occurred at the
beginning of Fiscal 1997. The unaudited pro forma information is not necessarily
indicative of the results of operations of the combined company had the
acquisition actually occurred at the beginning of Fiscal 1997, nor is it
necessarily indicative of future results.

<TABLE>
<CAPTION>
                                                                                         YEAR ENDED
                                                                                        MAY 31, 1997
                                                                          (Amounts in thousands, except per share
                                                                                           data)
<S>                                                                       <C>
Operating revenues...................................................                      $ 39,896
Loss before extraordinary gain.......................................                        (5,192)
Net loss.............................................................                        (3,020)
Loss per share:
   Loss before extraordinary gain....................................                         (1.68)
   Net loss per common share.........................................                         (0.98)
</TABLE>



                                       32

<PAGE>   33
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           May 31, 1999, 1998 and 1997


NOTE 6 -- ACCOUNTS RECEIVABLE
         Accounts receivable consist of the following:

<TABLE>
<CAPTION>
                                                                                                 MAY 31,
                                                                                        1999                1998
                                                                                      --------             -------
                                                                                         (Amounts in thousands)
<S>                                                                                   <C>                  <C>
Accounts receivable - managed care capitation contracts.....................          $    456             $   279
Accounts receivable withholdings - managed care capitation contracts........               576               1,837
Other trade accounts receivable.............................................               823               2,057
                                                                                      --------             -------
   Total accounts receivable................................................          $  1,855             $ 4,173
                                                                                      ========             =======
</TABLE>

The following table summarizes changes in the Company's allowances for doubtful
accounts for the years ended May 31, 1999, 1998 and 1997:

<TABLE>
<CAPTION>
                                          BALANCE          ADDITIONS
                                       BEGINNING OF       CHARGED TO                        WRITE-OFF OF     BALANCE END OF
                                           YEAR             EXPENSE        RECOVERIES         ACCOUNTS            YEAR
                                       ------------       ----------       ----------       ------------     --------------
                                                                      (Amounts in thousands)
<S>                                    <C>                <C>              <C>              <C>              <C>
Year ended May 31, 1999*............      $   893           $ 3,582          $ (268)          $ (3,284)          $ 923
Year ended May 31, 1998.............          883               575            (324)              (241)            893
Year ended May 31, 1997.............      $ 1,027           $   914          $ (375)          $   (683)          $ 883
</TABLE>

         *Includes $1,673 charged to discontinued operations.

         Recoveries are reflected on the Company's statement of operations as a
reduction to the provision for doubtful accounts in the period in which they are
received.


NOTE 7 -- OTHER RECEIVABLE

         Other receivable at May 31, 1999, and 1998 represents $2.4 million paid
to a vendor to prepare a federal income tax refund that is more fully described
in Note 14. The costs incurred will be refunded to the Company should the
Internal Revenue Service disallow the refund and require its repayment. To the
extent that all or some portion of the refund is allowed by the IRS, a portion
of the fees paid will be recognized as expense in proportion to the amount of
refund allowed.



NOTE 8 -- PROPERTY AND EQUIPMENT HELD FOR SALE

         During the fiscal year ended May 31, 1999, the Company sold its
non-operating facility located in Fort Worth, Texas for $1.8 million in cash,
which approximated its net book value.

         During the fiscal year ended May 31, 1998, the Company sold its
non-operating hospital facility in Cincinnati, Ohio for $3.0 million cash. The
Company recognized a gain of $0.2 million on the disposition.

         During the fiscal year ended May 31, 1997, the Company sold its
non-operating facility located in Costa Mesa, California for $2.3 million. The
Company received cash of $0.4 million and took a note receivable for $1.9
million. During the fourth quarter of Fiscal 1998, the Company collected cash in
full settlement of the note receivable and, at the same time, recognized a gain
of $0.1 million that was deferred from Fiscal 1997.

         During the fiscal year ended May 31, 1997, the Company also sold its
non-operating facility located in Jacksonville Beach, Florida, for $1.1 million
cash, which approximated its net book value.


                                       33

<PAGE>   34
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           May 31, 1999, 1998 and 1997


         A summary of the transaction affecting the carrying value of property
and equipment held for sale is as follows:

<TABLE>
<CAPTION>
                                                                              MAY 31,
                                                                   1999                 1998
                                                                   ----                 ----
                                                                     (Amounts in thousands)
<S>                                                               <C>                 <C>
Beginning balance ...........................                     $ 1,910             $ 4,707
Carrying value of assets sold ...............                      (1,764)             (2,797)
Write-down of assets ........................                        (146)                 --
                                                                  -------             -------
Ending balance ..............................                     $    --             $ 1,910
                                                                  =======             =======
</TABLE>


NOTE 9 -- PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                                            MAY 31,
                                                                    1999                1998
                                                                  -------             -------
                                                                    (Amounts in thousands)
<S>                                                               <C>                 <C>
Land and improvements .......................                     $    --             $ 2,122
Buildings and improvements ..................                          --               4,424
Furniture and equipment .....................                       3,978               4,538
Leasehold improvements ......................                         301                 315
Capitalized leases ..........................                          17                  17
                                                                  -------             -------
                                                                    4,296              11,416
Less accumulated depreciation ...............                      (2,326)             (4,373)
                                                                  -------             -------
Net property and equipment ..................                     $ 1,970             $ 7,043
                                                                  =======             =======
</TABLE>

     During Fiscal 1999, the Company sold its remaining operating hospital
facility, which had a net book value of $4.8 million at May 31, 1998.


NOTE 10 -- NOTES RECEIVABLE

Notes receivable consist of the following:

<TABLE>
<CAPTION>
                                                                         MAY 31,
                                                                   1999             1998
                                                                  -------             ---
                                                                  (Amounts in thousands)
<S>                                                               <C>                 <C>
8% promissory note with monthly principal and interest
        payments, maturing in April, 2006 (a) ........            $ 1,200             $--
Other ................................................                 --              94
                                                                  -------             ---
                                                                    1,200              94
Less current maturities ..............................                (28)             --
                                                                  -------             ---
                                                                  $ 1,172             $94
                                                                  =======             ===
</TABLE>

(a)      During Fiscal 1999, the Company sold its Aurora, Colorado facility for
         approximately $3.3 million in cash plus $1.2 million in a secured
         promissory note (see Note 5 -- "Acquisitions and Dispositions"). At
         maturity, on April 1, 2006, there is a balloon payment due of
         approximately $1.0 million.



                                       34
<PAGE>   35
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           May 31, 1999, 1998 and 1997



NOTE 11 -- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
                                                                                                       MAY 31,
                                                                                                  1999        1998
                                                                                                -------     -------
                                                                                                (Amounts in thousands)
         <S>                                                                                    <C>         <C>
         Accounts payable and accrued liabilities ......................................        $ 1,571     $ 2,012
         Accrued restructuring..........................................................            433          50
         Accrued salaries and wages.....................................................            524         683
         Accrued vacation...............................................................            275         376
         Accrued legal and audit........................................................            626         271
         Payable to third-party intermediaries..........................................          1,094       2,353
         Deferred compensation..........................................................             29          44
                                                                                                -------     -------
                                                                                                $ 4,552     $ 5,789
                                                                                                =======     =======
</TABLE>

NOTE 12 -- ACCRUED CLAIMS PAYABLE

         During the fourth quarter of the fiscal year ended May 31, 1998, the
Company changed its methodology for estimating accrued claims payable. Prior to
Fiscal 1998, the Company based its estimates on open authorizations. The
revised method uses a traditional actuarial completion factor methodology. This
change in methodology, which is inseparable from a change in estimate, provides
a better estimate of the ultimate liability that will be incurred. As a result
of the change, the Company reduced the accrued claims payable by $1.3 million
which increased basic and diluted earnings per common share applicable to
continuing operations and net income by $.38 and $.34, respectively.

Accrued claims payable consist of the following:

<TABLE>
<CAPTION>
                                                                                                       MAY 31,
                                                                                                  1999        1998
                                                                                                -------     -------
                                                                                                (Amounts in thousands)

         <S>                                                                                    <C>         <C>
         Actuarially estimated claims payable...........................................        $ 4,093     $ 4,761
         Subcapitation payable..........................................................            276          85
                                                                                                -------     -------
         Total accrued claims payable...................................................        $ 4,369     $ 4,846
                                                                                                =======     =======
</TABLE>

         The Company recognized $1.6 million, $2.6, and $3.9 million in
subcapitation expense for the years ended May 31, 1999, 1998 and 1997,
respectively. The Company would remain liable to perform the services covered
under the subcapitation agreements if the parties with which the Company
subcapitates were unable to fulfill their responsibilities under the
subcapitation agreement.


NOTE 13 -- LONG-TERM DEBT AND SHORT-TERM BORROWINGS

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                                       MAY 31,
                                                                                                 1999         1998
                                                                                                -------     -------
                                                                                               (Amounts in thousands)
         <S>                                                                                    <C>         <C>
         7 1/2% convertible subordinated debentures due April, 2010,
            interest payable semi-annually in April and October.........................        $ 2,244     $ 2,692
         Other long-term debt...........................................................             12          14
                                                                                                -------     -------
         Total long-term debt...........................................................          2,256       2,706
         Less current maturities of long-term debt......................................              3           2
                                                                                                -------     -------
         Long-term debt, excluding current maturities...................................        $ 2,253     $ 2,704
                                                                                                =======     =======
</TABLE>

              As of May 31, 1999, aggregate annual maturities of long-term debt
to be paid in Fiscal 2000 total approximately $3,000. The Company has no annual
maturities of long-term debt after Fiscal 2000 until 2010.



                                       35
<PAGE>   36
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           May 31, 1999, 1998 and 1997


         On December 30, 1996, the Company completed a debenture exchange offer
with its debentureholders. An aggregate of $6.8 million of principal amount of
debentures, representing 72% of the issued and outstanding Debentures, was
tendered for exchange to the Company. Pursuant to the terms of the Exchange
Offer, the Company paid approximately $4.0 million and issued 164,306 shares of
its Common Stock. The resulting net gain on the Debenture exchange was $2.2
million, which was recorded as an extraordinary gain in the accompanying
consolidated statement of operations for the year ended May 31, 1997.

         On July 24, 1998, the Company completed a debenture exchange offer
with its debentureholders. An aggregate of $0.4 million of principal amount
of Debentures, representing approximately 17% of the issued and outstanding
Debentures, were tendered for exchange to the Company pursuant to the terms of
the Exchange Offer and a total of 33,185 shares of Common Stock were issued by
the Company. The resulting gain on the Debenture Exchange of $0.1 million after
related costs and expenses, and was recorded as an extraordinary gain in
the accompanying consolidated statement of operations for the year ended
May 31, 1998.


NOTE 14 -- INCOME TAXES

         Provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                                                           YEAR ENDED MAY 31,
                                                                                     1999         1998         1997
                                                                                    -------     -------       ------
                                                                                          (Amounts in thousands)
     <S>                                                                            <C>         <C>           <C>
     Current:
     Federal....................................................................    $    --     $    --       $ (345)
     State......................................................................       (146)         63            4
                                                                                    -------     -------       ------
                                                                                    $  (146)    $    63       $ (341)
                                                                                    =======     =======       ======
</TABLE>

         Reconciliation between the provision for income tax applicable to
continuing operations and the amount computed by applying the statutory Federal
income tax rate (34%) to income (loss) from continuing operations before income
tax is as follows:

<TABLE>
<CAPTION>
                                                                                           YEAR ENDED MAY 31,
                                                                                    1999         1998        1997
                                                                                  --------     ------      --------
                                                                                        (Amounts in thousands)
     <S>                                                                          <C>          <C>         <C>
     Expense (Benefit) from income taxes at the statutory tax rate..............  $ (1,407)    $  692      $ (1,103)
     State income taxes, net of federal tax benefit.............................      (158)        81             3
     Non-deductible items.......................................................        52        137            51
     Change in valuation allowance..............................................     3,273       (995)          952
     Adjustment of net operating losses carryforwards...........................    (1,987)        --            --
     Refund of prior year loss carryback not previously benefitted..............        --         --          (345)
     Other, net.................................................................        81        148           101
                                                                                  --------     ------      --------
                                                                                  $   (146)    $   63      $   (341)
                                                                                  ========     ======      ========
</TABLE>

     The Company also received tax refunds of $5.4 million in 1997 and $9.4
million in 1996, associated with its final 1996 and 1995 Federal tax returns,
respectively, as discussed further below.




                                       36
<PAGE>   37
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           May 31, 1999, 1998 and 1997


     Significant components of the Company's deferred tax assets and liabilities
are comprised of the following:

<TABLE>
<CAPTION>

                                                                                                 MAY 31,
                                                                                           1999           1998
                                                                                        ---------       --------
                                                                                          (Amounts in thousands)
     <S>                                                                                <C>             <C>
     Deferred Tax Assets:
         Net operating losses...................................................        $  13,869       $ 10,957
         Restructuring/non-recurring costs......................................              164          1,285
         Alternative minimum tax credits........................................              667            667
         Payable to Third Party Intermediaries..................................              418            380
         Bad debt expense.......................................................              350            461
         Employee benefits and options..........................................              152            331
         Other, net.............................................................              294            157
                                                                                        ---------       --------
              Total Deferred Tax Assets.........................................           15,914         14,238
         Valuation Allowance....................................................          (14,555)       (11,282)
                                                                                        ---------       --------
         Net Deferred Tax Assets................................................            1,359          2,956
                                                                                        ---------       --------
     Deferred Tax Liabilities;
         Depreciation...........................................................             (442)        (1,240)
         State income taxes.....................................................             (386)          (410)
         Cash to accrual differences............................................             (531)        (1,306)
                                                                                        ---------       --------
              Total Deferred Tax Liabilities....................................           (1,359)        (2,956)
                                                                                        ---------       --------
     Net Deferred Tax Assets....................................................        $       0       $      0
                                                                                        =========       ========
</TABLE>

         In connection with the filing of its Federal income tax returns for
fiscal year 1995 and 1996, the Company filed for a tentative refund to carry
back losses described in Section 172(f) of the Internal Revenue Code ("IRC"),
requesting a refund of $9.4 million and $5.5 million, respectively, of which
refunds of $9.4 million and $5.4 million were received. In addition, the Company
also filed amended Federal income tax returns for fiscal years prior to 1995,
requesting similar refunds of losses carried back under Section 172(f) of $6.2
million for 1986; $0.4 million for 1985; $0.7 million for 1983; and $0.4 million
for 1982, a total of $7.7 million.

         During fiscal years 1997 and 1996, the Company recognized a portion of
the refunds received as a tax benefit of $0.3 million and $2.4 million,
respectively. The balance of the refunds received, $12.1 million, is recorded as
a deferred liability, "Unbenefitted tax refunds received", pending resolution by
the IRS of the appropriateness of the 172(f) carryback. The other refunds
requested under Section 172(f) for prior years of $7.7 million have not been
received nor has the Company recognized any tax benefit related to these
potential refunds.

         Section 172(f) of the IRC provides for a ten year net operating loss
carryback for specific losses attributable to (1) a product liability or (2) a
liability arising under a federal or state law or out of any tort if the act
giving rise to such liability occurs at least three years before the beginning
of the taxable year. The applicability of Section 172(f) to the type of business
in which the Company operates is unclear. The IRS may determine that the
Company's position and use of Section 172(f) is inappropriate and request a
return of some or all of the refunds received to date. No assurance can be
provided that the Company will be able to retain the refunds received to date or
that the other refunds requested will be received.

         On August 21, 1998, the Company received an examination report, dated
August 6, 1998, from the IRS advising the Company that it was disallowing $12.4
million of the $14.8 million of refunds previously received, and the additional
refunds requested of $7.7 million. If the position of the IRS were to be upheld
the Company would be required to repay $12.4 million in refunds previously
received, plus accrued interest of approximately $4.0 million through May 31,
1999. Accordingly, the Company would be entitled to a repayment of the fees
advanced to its tax advisor relating to these refunds of approximately $2.5
million of which $2.4 million is reported as "other receivable" in the
accompanying balance sheets. This report commences the administrative appeals
process. The Company filed a protest letter with the IRS on November 6, 1998 and
believes that its position with respect to its right to the tax refunds will be
upheld. The Company's tax advisor relating to these refund claims has advised
management that the administrative appeals process could take twelve to eighteen
months. In the event the Company wishes to further protest the results of its
administrative appeal, it may further appeal to the United States Tax Court
following the final determination of the administrative appeal. The Company has
been advised that a



                                       37
<PAGE>   38
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           May 31, 1999, 1998 and 1997



determination by the United States Tax Court could take up to an additional
twelve months from the commencement of the appeals process in the United States
Tax Court. The IRS reserves the right to assess and collect the tax previously
refunded to the Company at any time during the appeals process.

         If the IRS were to disallow the refunds claimed, the Company will have
additional loss carry forwards of approximately $50 million, which will expire
if unused by the year 2014.

         SFAS 109 requires a valuation allowance to reduce the deferred tax
assets reported if, based on the weight of the evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
After consideration of all the evidence, both positive and negative, management
has determined that a valuation allowance at May 31, 1999, and 1998, was
necessary to reduce the deferred tax assets to that amount that will more likely
than not be realized.

         At May 31, 1999, the Company had Federal accumulated net operating loss
carryforwards of approximately $37 million, which would expire in 2010 through
2014. The Company will be allowed a minimum tax credit carryover in the future
of approximately $0.7 million against regular tax in the event that regular tax
expense exceeds the alternative minimum tax expense.

         The Company may be unable to utilize some or all of its allowable tax
deductions or losses, which depends upon factors including the availability of
sufficient net income from which to deduct such losses during limited carryback
and carryover periods. Further, the Company's ability to use any net operating
losses may be subject to limitation in the event that the Company issues or
agrees to issue substantial amounts of additional equity. The Company monitors
the potential for "change of ownership" and believes that its financing plans as
contemplated will not cause a "change of ownership"; however, no assurances can
be made that future events will not act to limit the Company's tax benefits.


NOTE 15 -- DISCONTINUED OPERATIONS

         On March 11, 1999, the Company sold its Aurora, Colorado hospital at a
loss of $416,000, which completed the Company's plan to dispose of its hospital
business segment. Financial information relating to the discontinued hospital
business for the 1999, 1998, and 1997 fiscal years is as follows:

<TABLE>
<CAPTION>
                                                             FISCAL YEAR ENDED MAY 31,
                                                      1999*             1998           1997
                                                    -------           ------        -------
                                                              (Amounts in thousands)
<S>                                                 <C>               <C>             <C>
Operating revenues ...................              $ 2,713           $6,276          $ 6,973
                                                    -------           ------          -------
Costs and expenses:
   Healthcare operating expenses .....                2,492            5,658            7,080
   General and administrative expenses                   16              145               58
   Provision for doubtful accounts ...                  521                2              311
   Depreciation and amortization .....                   18               54               29
                                                    -------           ------          -------
                                                      3,047            5,859            7,478
                                                    -------           ------          -------
Income (loss) from operations ........              $  (334)          $  417          $  (505)
                                                    =======           ======          =======
</TABLE>

          *Year-to-date as of the November 30, 1998 measurement date.



                                      38
<PAGE>   39
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           May 31, 1999, 1998 and 1997



NOTE 16 -- EARNINGS PER SHARE

         The following table sets forth the computation of basic and diluted
earnings per share in accordance with Statement No. 128, Earnings Per Share:

<TABLE>
<CAPTION>
                                                                                                 YEAR ENDED MAY 31,
                                                                                         1999             1998          1997
                                                                                      -----------       -------       -------
                                                                                     (Amounts in thousands, except per share data)
<S>                                                                                   <C>               <C>           <C>
NUMERATOR:
   Income (loss) from continuing operations ....................................      $    (3,082)      $ 1,554       $(4,464)

   Less preferred stock dividends ..............................................              (55)          (82)          (31)
                                                                                      -----------       -------       -------
   Income (loss) from continuing operations available to common stockholders
     before extraordinary item .................................................           (3,137)        1,472        (4,495)
Effect of dilutive securities:
   Preferred Stock dividends ...................................................               --            82            --
                                                                                      -----------       -------       -------
Numerator for diluted earnings (loss) per share available to common
     stockholders from continuing operations after assumed conversions .........           (3,137)        1,554        (4,495)
Discontinued Operations:
   Operating income (loss) .....................................................             (334)          417          (505)
   Loss on disposal ............................................................             (698)           --            --
Extraordinary item .............................................................              120            --         2,172
                                                                                      -----------       -------       -------
Net income (loss) available to common stockholders after assumed conversions ...      $    (4,049)      $ 1,971       $(2,828)
                                                                                      ===========       =======       =======

DENOMINATOR:
   Weighted average shares .....................................................            3,562         3,384         3,088
Effect of dilutive securities:
   Employee stock options ......................................................               --           137            --
   Convertible preferred stock .................................................               --           344            --
                                                                                      -----------       -------       -------
   Dilutive potential common shares ............................................               --           481            --
   Denominator for diluted earnings (loss) per share-adjusted weighted average
     shares after assumed conversions ..........................................            3,562         3,865         3,088
                                                                                      ===========       =======       =======

BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations .......................................      $     (0.88)      $  0.44       $ (1.46)
Discontinued operations:
   Income (loss) from operations ...............................................            (0.09)         0.12         (0.16)

   Loss on disposal ............................................................            (0.20)           --            --

Extraordinary item .............................................................             0.03            --          0.70
                                                                                      -----------       -------       -------
Net income (loss) ..............................................................      $     (1.14)      $  0.56       $ (0.92)
                                                                                      ===========       =======       =======

DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations .......................................      $     (0.88)      $  0.40       $ (1.46)
Discontinued operations:
   Income (loss) from operations ...............................................            (0.09)          .11         (0.16)

   Loss on disposal ............................................................            (0.20)           --            --

Extraordinary item .............................................................             0.03            --          0.70
                                                                                      -----------       -------       -------
Net income (loss) ..............................................................      $     (1.14)      $  0.51       $ (0.92)
                                                                                      ===========       =======       =======
</TABLE>

Authorized shares of common stock reserved for possible issuance for convertible
debentures and stock options are as follows at May 31, 1999:

<TABLE>
     <S>                                                                              <C>
     Convertible debentures ....................................................            9,044
     Outstanding stock options .................................................          568,033
     Possible future issuance under stock option plans .........................          592,176
                                                                                      -----------
     Total .....................................................................        1,169,253
                                                                                      ===========
</TABLE>

                                       39
<PAGE>   40
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           May 31, 1999, 1998 and 1997


NOTE 17 -- EMPLOYEE BENEFIT PLANS

         The Company offers a 401(k) Plan, which is a defined contribution plan
qualified under Section 401(k) of the Internal Revenue Code, for the benefit of
its eligible employees. All full-time and part-time employees who have attained
the age of 21 and have completed six consecutive months of employment are
eligible to participate in the plan. Effective June 1, 1995, eligibility was
modified to six months of employment and a minimum of twenty (20) regularly
scheduled hours per week. Each participant may contribute from 2% to 15% of his
or her compensation to the Plan subject to limitations on the highly compensated
employees to ensure the plan is non-discriminatory. Company contributions are
discretionary and are determined quarterly by the Company's Board of Directors
or the Plan Committee. The Company's employer matching contributions were
$22,000, $31,000, and $26,000 to the Plan in Fiscal 1999, 1998, and 1997
respectively.

NOTE 18 -- PREFERRED STOCK, COMMON STOCK, AND STOCK OPTION PLANS

Preferred Stock

         The Company is authorized to issue up to 60,000 shares of Preferred
Stock, $50.00 par value, in one or more series, each series to have such
designation and number of shares as the Board of Directors may fix prior to the
issuance of any shares of such series. Each series may have such preferences and
relative participation, optional or special rights with such qualifications,
limitations or restrictions stated in the resolution or resolutions providing
for the issuance of such series as may be adopted from time to time by the Board
of Directors prior to the issuance of any such series. As of May 31, 1999, there
are no outstanding shares of Preferred Stock. The Board of Directors has
designated 41,260 shares of Preferred Stock as Series A Non-Voting 4% Cumulative
Convertible Preferred Stock, $50 par value (the "Preferred Stock). On January
17, 1997, the Preferred Stock was issued in exchange for the secured convertible
note due January 9, 1997, in the principal amount of $2.0 million and bearing
interest at the rate of 12% per annum and $63,000 of interest accrued thereon.
The Preferred Stock has a cumulative quarterly dividend of 4% per annum which is
payable when and as declared by the Board of Directors. However, no dividends
will be paid on the Preferred Stock until the Company has positive stockholder's
equity. The Preferred Stock is preferred to the extent of $50 per share plus
accrued dividends; is convertible into shares of Common Stock at $6 per share,
which was the same price at which the principal of the note was exchangeable;
and has no voting privileges.

         During February 1999, the 41,260 outstanding shares of Preferred Stock
were converted into 343,833 shares of Common Stock.

Common Stock

         The Company is authorized to issue 12.5 million shares of $.01 par
value Common Stock. As of May 31, 1999, approximately 3.8 million shares of the
Company's Common Stock were outstanding.

         On April 19, 1988, the Company declared a dividend of one common share
purchase right ("Right") for each share of Common Stock outstanding at May 6,
1988. Each Right entitles the holder to purchase one share of Common Stock at a
price of $300 per share, subject to certain anti-dilution adjustments. The
Rights are not exercisable and are transferable only with the Common Stock until
the earlier of ten days following a public announcement that a person has
acquired ownership of 25% or more of the Company's Common Stock or the
commencement or announcement of a tender or exchange offer, the consummation of
which would result in the ownership by a person of 30% or more of the Company's
Common Stock. In the event that a person acquires 25% or more of the Company's
Common Stock or if the Company is the surviving corporation in a merger and its
Common Stock is not changed or exchanged, each holder of a Right, other than the
25% stockholder (whose Rights will be void), will thereafter have the right to
receive on exercise that number of shares of Common Stock having a market value
of two times the exercise price of the Right. If the Company is acquired in a
merger or more than 50% of its assets are sold, proper provision shall be made
so that each Right holder shall have the right to receive or exercise, at the
then current exercise price of the Right, that number of shares of Common Stock
of the acquiring company that, at the time of the transaction, would have a
market value of two times the exercise price of the Right.


                                       40
<PAGE>   41
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           May 31, 1999, 1998 and 1997


The Rights are redeemable at a price of $.20 per Right at any time prior to ten
days after a person has acquired 25% or more of the Company's Common Stock.

Stock Option Plans

         The Company has a 1995 Incentive Plan (the "1995 Plan"). The 1995 Plan
provides for the granting of options to eligible employees and consultants to
the Company. Options granted as incentive stock options, stock rights, stock
appreciation rights, limited stock appreciation rights and restricted stock
grants under the 1995 Plan may qualify as Incentive Stock Options ("ISOs") under
Section 422A of the Internal Revenue Code. Options for ISOs may be granted for
terms of up to ten years and are generally exercisable in cumulative increments
of either 33% each year or 50% each six months. Options for Non-statutory Stock
Options ("NSOs") may be granted for terms of up to 13 years. The exercise price
for ISOs must equal or exceed the fair market value of the shares on the date of
grant, and 65% in the case of other options. The 1995 Plan also provides for the
full vesting of all outstanding options under certain change of control events.
The maximum number of shares authorized for issuance under the 1995 Plan is
1,000,000. As of May 31, 1999, there were 439,701 options outstanding, and of
these options, 195,000 options were exercisable under the 1995 Plans.

         In September 1995, the Board of Directors granted and issued to its
President and Chief Executive Officer, 100,000 Restricted Shares of its Common
Stock, $0.01 par value. Such grant of Restricted Shares was issued from the
Company's 1995 Incentive Plan and was ratified by the stockholders at the 1995
Annual Meeting. On December 19, 1997, the Company, with the consent of the
President and Chief Executive Officer, terminated a grant of the 50,500
remaining, unvested shares of Company common stock originally granted in
September 1995. Coincident with this transaction, the Company implemented a new
program to grant Mr. Street 120,000 options of common stock at a price of
$6.6875 (fair value on the date of grant). These options are fully vested,
non-incentive stock options, exercisable on and after June 17, 1998 and through
December 19, 2002, regardless of whether Mr. Street's employment with the
Company continues through that date.

         On November 17, 1998, the Company's Board of Directors approved the
re-pricing of stock option grants to employees below the level of Executive
Officers, subject to each employee returning his or her old options for
cancellation. The cancelled options were replaced by an equivalent number of new
options at an exercise price equal to the November 30, 1998 closing price of
$3.5625.

         On December 14, 1998, the Company's Board of Directors approved the
re-pricing of stock option grants for Executive Officers, subject to each
Executive Officer returning his or her old options for cancellation. For every
two options cancelled under the 1988 Incentive Stock Option and Non-statutory
Stock Option Plans, one option was reissued under the 1995 Incentive Stock
Option Plan. For every four options cancelled under the 1995 Incentive Stock
Option Plan, three new options were reissued. All reissued options are subject
to the provisions of the 1995 Plan, including vesting in accordance with the
Company's vesting policy. The exercise price of the reissued options equals the
December 14, 1998, closing price of $4.00.

         The Company has a non-qualified stock option plan for its outside
directors (the "Directors' Stock Option Plan" or the "Directors' Plan"). Each
non-qualified stock option is exercisable at a price equal to the Common
Stock's fair market value as of the date of grant. Initial grants vest annually
in 25% increments beginning on the first anniversary of the date of grant,
provided the individual is still a director on those dates. Annual grants will
become 100% vested as of the first annual meeting of the Company's stockholders
following the date of grant, provided the individual is still a director as of
that date. An optionee who ceases to be a director shall forfeit that portion
of the option attributable to such vesting dates on or after the date he or she
ceases to be a director. The maximum number of shares authorized for issuance
under the Directors' Plan is 250,000. As of May 31, 1999, the Company had no
outside directors; however, there were options outstanding to former directors
totaling 70,832, all of which were exercisable.

         The Company also has a 1988 ISO Plan and a 1988 NSO Plan. Effective
February 3, 1998, the 1988 plans expired and no new grants will be issued. As
of May 31, 1999, there were 57,500 options outstanding and, of these options,
49,250 were exercisable under the 1988 Plans.

         Adjusted pro forma information regarding net income or loss and
earnings or loss per share is required by SFAS No. 123, and has been determined
as if the Company had accounted for its employee stock options under the



                                       41
<PAGE>   42
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           May 31, 1999, 1998 and 1997


fair value method of SFAS 123. The fair value of these options was estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions for 1999: volatility factor of the expected market price
of the Company's Common Stock of 0.630; expected life of the options of five
years and four years; risk-free interest rate of 5.5% and dividend yield of 0%;
for 1998: volatility factor of the expected market price of the Company's Common
Stock of 0.526; expected life of the options of six years, five years, and four
years; risk-free interest rate of 5.5% and dividend yield of 0%. For 1997, the
assumptions were: volatility factor of the expected market price of the
Company's common stock of 0.524; expected life of the options of six years,
five years, and four years, risk-free interest rate of 5.5% and a dividend yield
of 0%.

         The Black-Scholes option valuation model was developed for use in
estimating the fair market value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair market value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options. Pro forma disclosures required by SFAS No. 123 include the effects of
all stock option awards that were granted by the Company from June 1, 1995
through May 31, 1999. During the phase-in period, the effects of applying this
statement for generating pro forma disclosures are not likely to be
representative of the effects on pro forma net income (loss) for future years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows ("in thousand" except for earnings (loss) per
share information):

<TABLE>
<CAPTION>
                                                                                      YEAR ENDED MAY 31,
                                                                                1999           1998         1997
                                                                             ---------        -------     ---------
     <S>                                                                     <C>              <C>         <C>
     Pro forma net income (loss) attributed to common stockholders........   $ (4,773)        $ 1,212     $ (3,210)
     Pro forma net earnings (loss) per common share:
        Basic.............................................................   $  (1.34)        $  0.36     $  (1.04)
        Diluted...........................................................   $  (1.34)        $  0.36     $  (1.05)
</TABLE>


                                       42
<PAGE>   43
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           May 31, 1999, 1998 and 1997



         A summary of the Company's stock option activity and related
information for the years ended May 31 is as follows:

<TABLE>
<CAPTION>
                                                                                                      WEIGHTED AVERAGE
                                                                                     SHARES             EXERCISE PRICE
                                                                                   ---------          ----------------
     <S>                                                                           <C>                <C>
     Outstanding as of May 31, 1996............................................     475,916               $    8.26
     Cancelled.................................................................      (1,300)                  13.85
     Granted...................................................................     399,174                   11.13
     Exercised.................................................................    (219,873)                   8.26
     Forfeited.................................................................     (24,668)                   9.45

     Outstanding as of May 31, 1997............................................     629,249               $   10.02
     Cancelled.................................................................     (12,000)                  13.64
     Granted...................................................................     493,949                    8.97
     Exercised.................................................................     (87,300)                   8.42
     Forfeited.................................................................    (299,683)                  10.50

     Outstanding as of May 31, 1998............................................     724,215               $    9.24
     Cancelled.................................................................    (474,550)                   9.15
     Granted...................................................................     548,651                    5.21
     Exercised.................................................................     (22,000)                   7.20
     Forfeited.................................................................    (208,283)                   8.84

     Outstanding as of May 31, 1999............................................     568,033               $    5.63
</TABLE>

     The weighted average fair values of options granted were $4.91, $5.18, and
$5.96 in Fiscal 1999, 1998, and 1997 respectively.

     A summary of options outstanding and exercisable as of May 31, 1999
follows:

<TABLE>
<CAPTION>
                                                 WEIGHTED-          WEIGHTED-                         WEIGHTED-AVERAGE
                             EXERCISE             AVERAGE            AVERAGE                          EXERCISE PRICE OF
          OPTIONS             PRICE              EXERCISE           REMAINING          OPTIONS           EXERCISABLE
        OUTSTANDING           RANGE                PRICE        CONTRACTUAL LIFE     EXERCISABLE           OPTIONS
        -----------     ------------------      -----------     ----------------     ------------     -----------------
     <S>                <C>                     <C>             <C>                  <C>              <C>
          320,701        $  3.56- $  6.24        $  3.85             9.52               76,000            $  3.99
          165,000        $  6.25- $  8.50        $  6.59             7.76              165,000            $  6.59
           34,166        $  8.51- $  9.75        $  9.13             8.52               34,166            $  9.13
           48,166        $ 10.00- $ 15.00        $ 11.65             7.81               39,916            $ 11.81
          -------                                                                      -------
          568,033                                $  5.63             8.81              315,082            $  6.90
          =======                                                                      =======
</TABLE>


NOTE 19 -- COMMITMENTS AND CONTINGENCIES

Lease Commitments

         The Company leases certain facilities, furniture and equipment. The
facility leases contain escalation clauses based on the Consumer Price Index and
provisions for payment of real estate taxes, insurance, and maintenance and
repair expenses. Total rental expense for all operating leases applicable to
continuing operations was $1.3 million, $1.0 million, and $1.0 million for
fiscal years 1999, 1998, and 1997 respectively.



                                       43
<PAGE>   44
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           May 31, 1999, 1998 and 1997



         Future minimum payments, by year and in the aggregate, under
non-cancelable operating leases with initial or remaining terms of one year or
more, consist of the following at May 31, 1999:

<TABLE>
<CAPTION>
         FISCAL YEAR                                                                   OPERATING LEASES
         -----------                                                                   ----------------
                                                                                    (Amounts in thousands)
         <S>                                                                        <C>
         2000...................................................................           $  733
         2001...................................................................              553
         2002...................................................................              131
         2003...................................................................              106
         2004...................................................................               69
         Later Years............................................................                0
                                                                                           ------
         Total minimum lease payments...........................................           $1,592
                                                                                           ======
</TABLE>

Other Commitments and Contingencies

(1)      On February 19, 1999, the California Superior Court denied the
         Company's Petition for Writ of Mandate of an adverse administrative
         appeal decision regarding application of the Maximum Inpatient
         Reimbursement Limitation ("MIRL") to Medi-Cal reimbursement paid to
         Brea Neuropsychiatric Hospital for its fiscal periods 1983 through
         1986. This facility was owned by the Company until its disposal in
         fiscal year 1991. The subject matter of the Superior Court action
         involved the refusal of the administrative law judge to order further
         reductions in the liability for costs associated with treating high
         cost, long stay Medi-Cal patients, which are commonly referred to as
         "outliers". The Company does not plan to appeal the California Superior
         Court decision for which the Notice of Entry of Judgment was entered on
         February 26, 1999. As of May 31, 1999, the Company has $1.1 million
         accrued relating to this matter.

(2)      On January 22, 1999, PMR Corporation ("PMR") commenced an action
         against the Company in San Diego Superior Court. This action seeks
         damages for alleged breach of a hospital management agreement in
         connection with the Aurora, Colorado facility. The Complaint seeks
         compensatory damages of approximately $455,000, plus interest and
         attorneys' fees. The Superior Court ordered this case into arbitration
         on March 26, 1999. PMR has recently filed a demand for arbitration of
         this dispute before the American Arbitration Association, to which the
         Company has not yet responded. The Company has filed a counter-claim in
         the arbitration for PMR's alleged breach of the same hospital
         management agreement and intends to actively defend this action. The
         Company does not believe that the impact of this claim will have a
         material adverse effect on the Company's financial position, results of
         operations and cash flows.

(3)      In January 1999, the Company was verbally advised by the staff of the
         New York Stock Exchange that the Exchange ("Exchange") would initiate
         action to remove the Company's Common Stock from listing on the
         Exchange. On February 17, 1999, the Exchange suspended trading of the
         Company's Common Stock. Effective February 24, 1999, the Company's
         Common Stock began trading on the Over The Counter Bulletin Board. No
         assurance may be given that the Company will meet the minimum listing
         requirements of another stock exchange.

(4)      On September 22, 1998, the Company commenced an action against HIP of
         New Jersey ("HIP") in the United States District Court for the District
         of New Jersey. Several causes of action were asserted; the principal
         one is for breach of contract and the Company is seeking $1.1 million
         of compensatory damages for the failure of HIP to pay certain cost
         savings and other monies due to Comprehensive Behavioral Care, Inc.
         pursuant to a written agreement.



                                       44
<PAGE>   45

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           May 31, 1999, 1998 and 1997



         In December, 1998, the Company received the "Notice to Network
         Providers of HIP, in Rehabilitation" ("Notice") that disclosed HIP had
         been placed in rehabilitation by the State of New Jersey, with the
         Commissioner of the Department of Banking and Insurance as named
         Rehabilitator. In accordance with the initial plan of rehabilitation,
         the Company had agreed to provide services to members of HIP at 75% of
         the Company's contract rate for the duration of the period of
         rehabilitation, or for 90 days, whichever period was shorter. The
         Company's contract with HIP terminated on March 31, 1999.

         In February 1999, there was a court-ordered dissolution of HIP and the
         State of New Jersey began the liquidation process. On March 31, 1999,
         the Company entered into a settlement agreement with HIP that required
         HIP to pay approximately $0.4 million to the Company in settlement of
         the Company's claim that was initiated in September 1998. The
         settlement does not limit or preclude the right of the Company to
         receive its pro-rata share of future distributions from HIP.

(5)      On December 29, 1997, Ms. Kerri Ruppert, the former Chief Financial
         Officer of the Company, commenced an action against the Company and
         its Chairman, Chriss W. Street, in the Superior Court of the State of
         California arising out of the termination of her employment on
         September 29, 1997. The action alleges alternate causes of action
         based upon her employment relationship with the Company and seeks
         unspecified damages for unpaid wages, unspecified actual, compensatory
         and punitive damages; damages for emotional distress; and costs, legal
         fees and penalties under applicable California law. As of May 31,
         1999, the action is in the discovery phase. The Company has denied its
         liability and has denied the principal allegations of the complaint.
         The Company believes that it has good and meritorious defenses to this
         action.

(6)      With respect to the contingency related to prior years' income taxes,
         see Note 14, "Income Taxes".

(7)      With respect to the contingency related to the Humana claim, see Note
         4, "Major Customers/Contracts".

         From time to time, the Company and its subsidiaries are also parties
and their property is subject to ordinary, routine litigation incidental to
their business. In some pending cases, claims exceed insurance policy limits and
the Company or a subsidiary may have exposure to a liability that is not covered
by insurance. Management believes that the outcome of such lawsuits will not
have a material adverse impact on the Company's financial statements.


REGULATORY MONITORING AND COMPLIANCE

         The Company is subject to extensive and evolving state and federal
regulations, ranging from licensure and compliance with regulations related to
insurance companies and other risk assuming entities to licensure and compliance
with regulations related to healthcare providers. These laws and regulations may
vary considerably among states and, as a result, the Company may be subject to
the specific regulatory approach adopted by each state for the regulation of
managed care companies and for providers of behavioral healthcare treatment
services.

         Currently, management cannot quantify the potential effects of
additional regulation of the managed care industry, but such costs could have an
adverse effect on future operations to the extent that they are not able to be
recouped in future managed care contracts. Management believes that the Company
is currently in material compliance with the laws and regulations of the
jurisdictions in which it operates.


NOTE 20 -- FOURTH QUARTER RESULTS FOR FISCAL 1999 - UNAUDITED

         The net loss from continuing operations for the fourth quarter of
Fiscal 1999 was $2.5 million, or $0.66 loss per share, compared to net income
from continuing operations of $0.9 million, or $0.23 diluted earnings per
share, for the quarter ended May 31, 1998. Included in the fourth quarter
results was a non-recurring restructuring charge totaling $0.6 million related
to the loss of the Company's Puerto Rico contract, $0.5 million of bad debt
expense, and $0.5 million of operating expense incurred after the termination
dates specific to the two major contracts that ended during the fourth quarter
(see Note 4 -- "Major Contracts/Customers"). The remaining loss is primarily
attributable to the loss of revenue following the termination of the Puerto
Rico contract.


NOTE 21 - RELATED PARTY TRANSACTIONS

         During Fiscal 1999, the Company had one operating lease for its
California facilities that required monthly payments to the lessor of $15,000.
As of May 31, 1999, the Company subleases 3,992 square feet, or 58% of the total
leased area, to Fruehauf Trailer Corporation ("Fruehauf"). Mr. Street, the
Company's Chairman, President, and Chief Executive Officer, is also the
Chairman, President, and Chief Executive Officer of Fruehauf, a company that
began operating as a debtor in possession in October 1996, but filed a Plan of
Reorganization on July 28, 1998. The Plan became effective October 27, 1998 and
Mr. Street currently serves as Trustee for The End of the Road Liquidating
Trust. During the fiscal year ended May 31, 1999, Fruehauf paid $106,000 to the
Company representing the total of 12 monthly payments that were due within the
1999 fiscal period.

                                       45
<PAGE>   46

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

                                    PART III

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

         Effective May 17, 1999, the Company has engaged Richard A. Eisner &
Company, LLP ("RAE") as independent accountants to audit its financial
statements for the fiscal year ending May 31, 1999. The engagement of RAE is in
lieu of Ernst & Young, LLP ("E&Y"), who was dismissed by the Company on May 17,
1999. E&Y has audited the Company's financial statements for each of the two
most recent fiscal years, and with respect to which had included in its reports
a "going concern" uncertainty and, for the fiscal year ended May 31, 1998,
included an explanatory paragraph regarding the Company's change in the method
used for estimating its claims liability.

         The Company has not, during its two preceding fiscal years and any
subsequent interim periods, had any dispute or disagreement with E&Y on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure which if not resolved to the satisfaction of E&Y
would have caused E&Y to make reference to the matter in their report.

         The engagement of RAE in lieu of E&Y was prompted by economic
consideration and was concurred to by the Board of Directors of the Company.


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

         The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
         NAME                               AGE                      POSITION
         ----                               ---                      --------
<S>                                         <C>      <C>
Chriss W. Street                             49      Chairman of the Board of Directors (1)(2),
                                                     President(1)(2), and Chief Executive Officer(1)

Mary Jane Johnson                            49      Executive Vice President and Chief Operating Officer (1),
                                                     Chief Executive Officer(2), and Director (1)(2)

Robert Landis                                40      Executive Vice President(1)(2), Chief Financial Officer (1)(2),
                                                     Treasurer (1)(2), and Director (1)

William H. Boucher                           67      Director (3)

J. Marvin Feigenbaum                         49      Director (3)

A. Richard Pantuliano                        54      Director (4)

John A. McCarthy, Jr.                        40      Director (5)
</TABLE>

-------------------------------
(1) Comprehensive Care Corporation.
(2) Comprehensive Behavioral Care, Inc. (Principal subsidiary of the Company).
(3) Messrs. Boucher and Feigenbaum each resigned as a Class I Director in
    April, 1999.
(4) Mr. Pantuliano resigned as a Class I Director in April, 1999.
(5) Mr. McCarthy resigned as a Class II Director in September, 1998.


         As of May 31 1999, the Board of Directors comprises three directors
with each member serving as a separate class of director. The three classes
serve staggered three-year terms. Directors for each class are elected at the
Annual Meeting of Stockholders held in the year in which the term for such class
expires. Mr. Street is a Class II director whose term expires at the 1999 Annual
Meeting. Ms. Johnson is a Class I Director whose term expires at the 2000 Annual
Meeting. Mr. Landis is a Class III director whose term expires at the 2001
Annual Meeting.




                                       46
<PAGE>   47
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES



         CHRISS W. STREET, age 49. Mr. Street has been employed by the Company
as Chairman, President and Chief Executive Officer since 1994. Mr. Street is a
Class II director whose term expires at the 1999 Annual Meeting. Mr. Street
served on the Stock Option Committee of the Board of Directors of Nu-Tech
Bio-Med, Inc. until his resignation on March 1, 1999 (see Item 13, "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS - COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION"). In June 1996, Mr. Street joined the Board of Directors
of Fruehauf Trailer Corporation. On October 7, 1996, Fruehauf Trailer
Corporation filed for relief under Chapter 11 of the United States Bankruptcy
Code and subsequently, Mr. Street was named Chairman, President, and Chief
Executive Officer. Fruehauf Trailer Corporation has been operating as a debtor
in possession since October 1996, but filed a Plan of Reorganization on July 28,
1998. The Plan became effective October 27, 1998 and Mr. Street currently serves
as Trustee for The End of the Road Liquidating Trust. Mr. Street is the founder
and principal of Chriss Street & Company, an investment banking corporation
specializing in corporate reorganization, factoring and securities trading. Mr.
Street served as a board member of the Orange County Employee's Retirement
System between February 1996 and December 1997. Mr. Street served as a member of
the Board of Directors of StreamLogic Corporation (formerly known as Micropolis
Corporation), from February 1996 to May 1997. Mr. Street is a graduate of the
University of California, Irvine and the Stanford Business School Executive
Program.


         MARY JANE JOHNSON, RN, MBA, age 49. Ms. Johnson has been employed by
the Company since August 1996 and was appointed Executive Vice President
Clinical Operations in September 1997. In August 1998, Ms. Johnson was appointed
to the position of Chief Executive Officer for the Company's principal
subsidiary, CompCare. In July 1999, Ms. Johnson was appointed to the position of
Chief Operating Officer of Comprehensive Care Corporation. Beginning on April
23, 1999, Ms. Johnson is a Class I director whose term expires at the 2000
Annual Meeting. Ms. Johnson served as Executive Director for Merit Behavioral
Care from 1993 to 1996. Ms. Johnson, a Registered Professional Nurse, has a
Bachelors Degree in Nursing from the State University of New York and a Masters
Degree in Business Administration from Adelphi University.


         ROBERT J. LANDIS, CPA, MBA, age 40. Mr. Landis has served as Executive
Vice President, Chief Financial Officer, and Treasurer since July 1998.
Beginning on April 23, 1999, Mr. Landis is a Class III director whose term
expires at the 2001 Annual Meeting. Mr. Landis served as Treasurer of Maxicare
Health Plans, Inc., a health maintenance organization from November 1988 to July
1998. Mr. Landis, a Certified Public Accountant, received a Bachelors Degree in
Business Administration from the University of Southern California, and a
Masters Degree in Business Administration from California State University at
Northridge.






                                       47
<PAGE>   48
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES


ITEM 11.  EXECUTIVE COMPENSATION

         This section discloses the compensation earned by the Company's Chief
Executive Officer and its other executive officers whose total salary and bonus
for Fiscal 1999 exceed $100,000 (together, these persons are sometimes referred
to as the "named executives").

                      TABLE I - SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>

                                                                       ANNUAL COMPENSATION
                                                                                                             RESTRICTED
                                                                                           OTHER ANNUAL         STOCK
                                                                                           COMPENSATION        AWARD(S)
   FY           NAME                    POSITION               SALARY ($)    BONUS ($)          ($)               ($)
<S>     <C>                  <C>                               <C>           <C>           <C>               <C>
1999    Chriss W. Street     Chairman of the Board of           300,861       80,000            5,831 (1)          --
                             Directors (13,14),
1998    Chriss W. Street      President(13,14)                  264,263           --            6,000 (1)          --
1997    Chriss W. Street     and Chief Executive Officer(13)    245,192       15,947            5,837 (1)     589,919 (2)

1999    Mary Jane Johnson    Executive Vice President and       146,930       50,000               --              --
1998    Mary Jane Johnson    Chief Operating Officer(13),       110,040       20,000               --              --
1997    Mary Jane Johnson    Chief Executive Officer(14),        97,125 (5)    5,000               --              --
                             and Director(13,14)

1999    Robert Landis        Executive Vice President(13),      139,408 (9)   45,000           32,967 (8)          --
                             Chief Financial Officer
1998    Robert Landis         (13,14),                               --           --               --              --
1997    Robert Landis        Treasurer (13,14), and                  --           --               --              --
                             Director (13)

1999    Joni Cummings        Executive Vice President of        121,142           --           50,024 (7)          --
1998    Joni Cummings        Business Development(13)(15)       100,025           --           18,412 (6)          --
1997    Joni Cummings                                            76,949           --           24,308 (6)          --

1999    H.G. Whittington     Executive Vice President            35,000 (10)  15,000               --              --
1998    H.G. Whittington     and National Medical               148,995       20,000               --              --
1997    H.G. Whittington     Director(14)                        50,468 (11)      --               --              --

<CAPTION>
                                                                       LONG-TERM COMPENSATION
                                                                    SECURITIES         LONG-TERM
                                                                    UNDERLYING         INCENTIVE       ALL OTHER
                                                                    OPTIONS/SARS        PAYOUTS      COMPENSATION
   FY           NAME                    POSITION                        (#)               ($)             ($)
<S>     <C>                  <C>                                   <C>                 <C>           <C>
1999    Chriss W. Street     Chairman of the Board of               217,501 (17)          --              906 (12)
                             Directors (13,14),
1998    Chriss W. Street      President(13,14)                      120,000               --           76,998 (3)
1997    Chriss W. Street     and Chief Executive Officer(13)         25,000               --          229,508 (4)

1999    Mary Jane Johnson    Executive Vice President and            20,000               --            1,051 (12)
1998    Mary Jane Johnson    Chief Operating Officer(13),            37,000               --            1,012 (12)
1997    Mary Jane Johnson    Chief Executive Officer(14),             3,000               --              331 (12)
                             and Director(13,14)

1999    Robert Landis        Executive Vice President(13),          153,125 (16)          --               --
                             Chief Financial Officer
1998    Robert Landis         (13,14),                                   --               --               --
1997    Robert Landis        Treasurer (13,14), and                      --               --               --
                             Director (13)

1999    Joni Cummings        Executive Vice President of             14,250               --               --
1998    Joni Cummings        Business Development(13)(15)            17,000               --               --
1997    Joni Cummings                                                 3,000               --               --

1999    H.G. Whittington     Executive Vice President                    --               --               --
1998    H.G. Whittington     and National Medical                    19,000               --               --
1997    H.G. Whittington     Director(14)                             1,000               --               --

</TABLE>


(1)      Represents a car allowance paid by the Company and in accordance with
         Mr. Street's employment agreement.
(2)      In September 1995, the Board of Directors granted and issued to its
         President and Chief Executive Officer 100,000 Restricted Shares of its
         Common Stock, $0.01 per value. The Restricted Shares are subject to
         vesting at the rate of 5,000 Restricted Shares over a 20-year period.
         The vesting is subject to acceleration upon the occurrence of certain
         events as described below. As of May 31, 1997, 49,500 Restricted Shares
         were vested and 50,500 were unvested, with the holder having sole
         voting power. On December 16, 1997, the Company, with the consent of
         Chriss W. Street, terminated a grant of the remaining unvested shares
         originally granted in September 1995. Coincident with this transaction
         the Company implemented a new program to grant Mr. Street 120,000
         options of Common Stock at a price of $6.6875. The options are fully
         vested, non-incentive stock options, exercisable on and after June 17,
         1998, and through December 19, 2002, regardless of whether Mr. Street's
         employment with the Company continues through that date.
(3)      Represents $75,873 of a one-time bonus for taxes payable due to the
         acceleration of Restricted Shares and $1,125 in amounts contributed to
         Mr. Street's 401(k) Plan Account.
(4)      Represents $227,589 of a one-time bonus for taxes payable due to the
         acceleration of Restricted Shares and $1,919 in amounts contributed to
         Mr. Street's 401(k) Plan Account.
(5)      Between August 1, 1996, and January 25, 1997, Ms. Johnson served as an
         independent consultant to the Company for which she received an
         aggregate compensation of $53,000.
(6)      Represents commissions paid to Ms. Cummings.
(7)      Represents severance paid to Ms. Cummings.
(8)      Represents moving expenses paid to Mr. Landis.
(9)      Mr. Landis was employed by the Company on July 2, 1998.
(10)     Dr. Whittington ceased to be an executive officer of the Company on
         August 15, 1998.
(11)     Dr. Whittington was employed on January 13, 1997. Accordingly, amounts
         shown for Dr. Whittington reflect compensation that he earned from his
         date of hire through the end of Fiscal 1997.
(12)     Represents amounts contributed by the Company to the indicated person's
         401(k) Plan Account.
(13)     Comprehensive Care Corporation.
(14)     Comprehensive Behavioral Care, Inc., Principal Subsidiary of the
         Company.
(15)     Ms. Cummings ceased being an Executive Officer of the Company on April
         16, 1999.
(16)     Includes 87,500 options issued at $10.00 per share that were cancelled
         and repriced at $4.00 per share on December 14, 1998.
(17)     Includes $100,000 of options issued at $6.00 per share that were
         cancelled and repriced at $4.00 per share on December 14, 1998.



                                       48
<PAGE>   49
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES


Employment Agreements

     On September 14, 1998, the Company entered into an employment agreement
with Mr. Chriss W. Street that has a term expiring on November 30, 2001. Mr.
Street's employment agreement as amended provides for a salary at the rate of
$300,000 per annum and includes a performance based bonus of up to a target
amount of $100,000 in connection with the Company's Annual Management Bonus Plan
("MBP Plan"). In addition, Mr. Street is provided with health insurance and
other benefits and a policy of life insurance. He also receives an auto
allowance of $600 per month and reimbursement for expenses incurred on behalf of
the Company and in connection with the performance of his duties. The agreement
obligates the Company to use its best efforts to cause Mr. Street to continue to
be elected as a Class II director, and as Chairman of its Board of Directors.
The agreement provides that the Company procures Directors and Officers
Liability Insurance in an amount not less than $1.0 million. Mr. Street's
employment agreement provides that in the event of a change of control of the
Company as defined, Mr. Street will be paid a severance benefit equal to the
greater of (i) the balance of his base salary for the remainder of the unexpired
term of his agreement or (ii) two times the sum of Mr. Street's then prevailing
base salary.

     During Fiscal 1997, certain objective non-discretionary conditions for
acceleration related to the vesting of 37,000 Restricted Shares granted to the
CEO were achieved. Based on increases in the fair market value of the Company's
Common Stock, the Company provided for compensation expenses of $0.5 million for
the acceleration of 37,000 Restricted Shares; to be earned in the fiscal year
ended May 31, 1997. In addition, the estimated bonus payments for income taxes
as provided for in the employment agreement were approximately $0.2 million
during Fiscal 1997.

     On July 2, 1999, the Company entered into an employment agreement with
Ms. Mary Jane Johnson. Ms. Johnson's employment agreement provides for a salary
at the rate of $175,000 per annum and includes a performance-based bonus of up
to a target amount of $75,000 in connection with the Company's MBP Plan. In
addition, Ms. Johnson is provided with health insurance and other benefits and a
policy of life insurance.

     On September 14, 1998, the Company entered into an employment agreement
with Mr. Robert J. Landis that has a term expiring on January 2, 2000. Mr.
Landis' employment agreement as amended provides for a salary at the



                                       49
<PAGE>   50
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES



rate of $150,000 per annum and a performance-based bonus of up to a target
amount of $60,000 in connection with the Company's MBP Plan. In addition, Mr.
Landis is provided with health insurance and other benefits and a policy of life
insurance. Mr. Landis' employment agreement provides that, in the event of a
change in control of the Company as defined, Mr. Landis will be paid a severance
benefit equal to the greater of (i) the balance of his base salary for the
remainder of the unexpired term of his agreement or (ii) twelve (12) months base
salary, together with his incentive bonus.

     Effective July 2, 1999, each executive officer is eligible to receive a
retention bonus in connection with the Company's Stay Bonus Retention Pool
program, provided that he or she continues as an active employee through
December 31, 2000.

Indemnification Agreement

     In connection with the Company's indemnification program for executive
officers and directors, Messrs. Street and Landis and Ms. Johnson, as well as
eight former directors and six former executive officers, are entitled to
indemnification.

     The Company considers it desirable to provide each indemnitee with
specified assurances that the Company can and will honor the Company's
obligations under the Indemnification Agreements, including a policy of
insurance to provide for directors and officers liability coverage.

Executive Termination Agreements

     For information related to the termination benefits, see the
description of "Employment Agreements" for Messrs. Street and Landis and Ms.
Johnson under Executive Compensation.

                     TABLE II - OPTIONS HELD AT MAY 31, 1999

         The following tables present information regarding the number of
unexercised options held by the Company's named executives at May 31, 1999.
There were no options exercised by the Company's named executives during Fiscal
1999. No stock appreciation rights were granted or held by such persons during
Fiscal 1999.

                      OPTION GRANTS IN THE LAST FISCAL YEAR

<TABLE>
<CAPTION>
                            NUMBER OF        PERCENT OF TOTAL
                           SECURITIES          OPTIONS/SARS          EXERCISE
                           UNDERLYING           GRANTED TO            OR BASE                               GRANT DATE
                          OPTIONS/SARS         EMPLOYEES IN            PRICE             EXPIRATION            PRESENT
         NAME              GRANTED (#)         FISCAL YEAR           ($/SHARE)              DATE                VALUE
----------------------- ------------------  -------------------   -----------------   ------------------  ------------------
<S>                     <C>                 <C>                   <C>                 <C>                 <C>
Chriss W. Street              117,501(1)            21.4%             $   4.00           12/14/2008             $ 2.33
                              100,000(2)            18.2%             $   6.00           09/14/2008             $ 2.17
Mary Jane Johnson              20,000(1)             3.6%             $   4.00           12/14/2008             $ 2.33
Robert J. Landis               65,625(1)            12.0%             $   4.00           12/14/2008             $ 2.33
                               87,500(2)            15.9%             $  10.00           07/02/1998             $ 5.82
Joni Cummings                  14,250(1)             2.6%             $   4.00           12/14/2008             $ 2.33
H.G. Whittington                   --                 --                    --                   --                 --
</TABLE>
--------------------
(1)      On December 14, 1998, the Company's Board of Directors approved the
         re-pricing of stock option grants for Executive Officers, subject to
         each Executive Officer returning his or her old options for
         cancellation (see Note 18 to the audited consolidated financial
         statements -- "Preferred Stock, Common Stock, and Stock Option Plans").
(2)      Represents original options granted under the 1995 Incentive Stock
         Option Plan during Fiscal 1999. These options were cancelled on
         December 14, 1998 (see Note 18 to the audited consolidated financial
         statements -- "Preferred Stock, Common Stock, and Stock Option Plans").

         The fair value as of the date of grant, calculated using the
Black-Scholes method is based on assumptions about future interest rates, stock
price volatility and dividend yield. There is no assurance that these
assumptions will prove to be true in the future. The actual value, if any, that
may be realized by each individual will depend upon the market price of the
common stock on the date of exercise.


                                       50
<PAGE>   51
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES


               AGGREGATED OPTION/SAR EXERCISE IN LAST FISCAL YEAR
                   AND AGGREGATED FISCAL YEAR-END OPTION VALUE

<TABLE>
<CAPTION>
                                                                             NUMBER OF
                                                                            SECURITIES             VALUE OF
                                                                             UNDERLYING           UNEXERCISED
                                                                             UNEXERCISED           IN-THE-MONEY
                                                                          OPTIONS/SARS AT       OPTIONS/SARS AT
                                   SHARES                VALUE               FY END (#)            FY END ($)
                                ACQUIRED ON             REALIZED            EXERCISABLE/          EXERCISABLE/
          NAME                  EXERCISE (#)              ($)             UNEXERCISABLE(2)       UNEXERCISABLE
--------------------------   -------------------   -------------------   -------------------   -------------------
<S>                          <C>                   <C>                   <C>                   <C>
Chriss W. Street(1)                  --                    --              235,000/42,501                0/0
Mary Jane Johnson                    --                    --                    0/20,000                0/0
Robert J. Landis                     --                    --                    0/65,625                0/0
Joni Cummings                        --                    --                          --                 --
H.G. Whittington                     --                    --                          --                 --
</TABLE>
--------------
(1)  Exercisable options include options for 24,000 and 16,000 shares granted in
     the Company's 1988 Incentive Stock Option and Non-statutory Plans at $6.25
     per share and options for 120,000 and 75,000 shares granted in the
     Company's 1995 Incentive Stock Option Plan at $6.6875 and $4.00
     respectively.
(2)  Unexercisable options represent options reissued during Fiscal 1999 (see
     Note 18 to the audited consolidated financial statements -- "Preferred
     Stock, Common Stock, and Stock Option Plans").


                         TEN-YEAR OPTION/SAR REPRICINGS

<TABLE>
<CAPTION>
                                                                                                                  LENGTH OF
                                           NUMBER OF        MARKET PRICE                                          ORIGINAL
                                          SECURITIES         OF STOCK AT        EXERCISE                        OPTION TERM
                                          UNDERLYING           TIME OF          PRICE AT           NEW          REMAINING AT
                                         OPTIONS/SARS       REPRICING OR        TIME OF          EXERCISE          DATE OF
                                          REPRICED OR         AMENDMENT       REPRICING OR        PRICE         REPRICING OR
        NAME                DATE        AMENDED (#)(1)           ($)           AMENDMENT           ($)          AMENDMENT(2)
----------------------  -------------  ------------------  ----------------  ---------------  ---------------  ----------------
<S>                     <C>            <C>                 <C>               <C>              <C>              <C>
Chriss W. Street          12/14/1998         100,000           $ 4.00        $   6.0000           $ 4.00               9.75
                          12/14/1998          25,000           $ 4.00        $   7.8750           $ 4.00               7.69
                          12/14/1998          20,000           $ 4.00        $   8.0000           $ 4.00               6.23
                          12/14/1998          20,000           $ 4.00        $  10.0000           $ 4.00               6.23
                          12/14/1998          20,000           $ 4.00        $  12.0000           $ 4.00               6.23
Mary Jane Johnson         12/14/1998          37,000           $ 4.00        $  10.8750           $ 4.00               8.73
                          12/14/1998           3,000           $ 4.00        $  13.8750           $ 4.00               8.30
 Robert J. Landis         12/14/1998          87,500           $ 4.00        $  10.0000           $ 4.00               9.55
Joni Cummings             12/14/1998          17,000           $ 4.00        $   8.0000           $ 4.00               9.11
                          12/14/1998           3,000           $ 4.00        $  13.8750           $ 4.00               8.30
H.G. Whittington                  --              --               --                --               --                 --
</TABLE>

--------------
(1)      On December 14, 1998, the Company's Board of Directors approved the
         re-pricing of stock option grants for Executive Officers, subject to
         each Executive Officer returning his or her old options for
         cancellation. For every two options cancelled under the 1988 Incentive
         Stock Option and Non-statutory Stock Option Plans, one option was
         reissued under the 1995 Incentive Stock Option Plan. For every four
         options cancelled under the 1995 Incentive Stock Option Plan, three new
         options were reissued. All reissued options are subject to the
         provisions of the 1995 Plan, including vesting in accordance with the
         Company's vesting policy. The exercise price of the reissued options
         equals the December 14, 1998, closing price of $4.00.
(2)      The stated term equals the remaining life in years.



                                       51
<PAGE>   52

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES



ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth information concerning the beneficial
ownership of Common Stock by the directors of the Company, the executive
officers named in the Summary Compensation Table included elsewhere herein and
all directors and executive officers as a group and by each person who, to the
knowledge of the Company, beneficially owned more than 5% of any class of the
Company's voting stock as of July 31, 1999. According to rules adopted by the
Securities and Exchange Commission, a person is the "beneficial owner" of
securities if he or she has, or shares, the power to vote them or to direct
their investment. Except as otherwise noted, the indicated owners have sole
voting and investment power with respect to shares beneficially owned.

<TABLE>
<CAPTION>
                                                             AMOUNT AND NATURE OF
                   NAME OF BENEFICIAL OWNER                  BENEFICIAL OWNERSHIP        PERCENT OF CLASS
         ----------------------------------------------  -----------------------------  -------------------
         <S>                                             <C>                            <C>
         Chriss W. Street (1)                                       221,760                    5.8%
         Mary Jane Johnson                                                0                      *
         Robert J. Landis (3)                                        66,125                    1.7%
         Joni Cummings (4)                                               --                     --
         H.G. Whittington (5)                                            --                     --
         John A. McCarthy, Jr. (6)                                       --                     --
         William H. Boucher (2)(7)                                   22,600                      *
         J. Marvin Feigenbaum (2)(7)                                 36,082                      *
         A. Richard Pantuliano (2)(8)                                17,500                      *

         All executive officers and directors                                                  9.5%
            As a group ( persons)
</TABLE>

* An asterisk in the Percent of Class Column indicates beneficial ownership of
  less that 1% of the outstanding Common Stock.
------------------------
(1)      Includes 12,260 shares held directly and 160,000 shares subject to
         options that are presently exercisable or exercisable within 60 days of
         July 31, 1999. Also includes 49,500 vested shares under a Restricted
         Stock Agreement over which the holder has the sole voting power.
(2)      Includes shares subject to options that are presently exercisable or
         exercisable within 60 days of July 31, 1999.
(3)      Includes 500 shares held directly and 65,625 shares subject to options
         that are exercisable within 60 days of July 31, 1999.
(4)      Ms. Cummings ceased being an Executive Officer of the Company on April
         16, 1999. Inclusion of Ms. Cummings on this table is only by reason of
         inclusion in the Summary Compensation Table.
(5)      On August 15, 1998, Dr. Whittington resigned from the Company as an
         officer and from all positions. Inclusion of Dr. Whittington on this
         table is only by reason of inclusion in the Summary Compensation Table.
(6)      Mr. McCarthy resigned as a Class II Director in September 1998.
(7)      Messrs. Boucher and Feigenbaum each resigned as a Class I Director in
         April 1999.
(8)      Mr. Pantuliano resigned as a Class III Director in April 1999.



ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Compensation Committee Interlocks and Insider Participation

         During Fiscal 1999, recommendations and administrative decisions
regarding the compensation of the Company's executives were made by the Board of
Directors, which is currently comprised entirely of persons who are officers or
employees of the Company.

         Mr. Street is a Director of the Company and served on the Stock Option
Committee of the Board of Directors of Nu-Tech Bio-Med, Inc. until his
resignation on March 1, 1999. The Company's former Vice-Chairman and Chairman of
the Compensation Committee, J. Marvin Feigenbaum, is also the Chairman of
Nu-Tech Bio-Med, Inc. Mr. Feigenbaum resigned from the Company's Board of
Directors in April 1999.



                                       52
<PAGE>   53
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES


                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a) 1.   Financial Statements - Included in Part II of this report:
              Report of Independent Certified Public Accountants
              Consolidated Balance Sheets, May 31, 1999 and 1998
              Consolidated Statements of Operations, Years Ended May 31, 1999,
              1998 and 1997
              Consolidated Statements of Stockholders' Deficit, Years Ended
              May 31, 1999, 1998 and 1997
              Consolidated Statements of Cash Flows,
              Years Ended May 31, 1999, 1998 and 1997
              Notes to Consolidated Financial Statements

         2.   Financial Statement Schedules:

              None.

         Other schedules are omitted, as required information is inapplicable or
the information is presented in the consolidated financial statements or related
notes.

         3.   Exhibits:

<TABLE>
<CAPTION>
              Number                     Description and Reference
              ------                     -------------------------
              <S>       <C>

               3.1      Restated Certificate of Incorporation as amended. (7)
               3.2      Restated Bylaws as amended November 14, 1994. (7)
               3.3      Certificate of Designation of Preferences and Rights of Series A Non-Voting 4% Cumulative
                        Convertible Preferred Stock. (10)
               4.1      Indenture dated April 25, 1985 between the Company and Bank of America, NT&SA, relating to
                        Convertible Subordinated Debentures. (1)
               4.2      Rights Agreement dated as of April 19, 1988 between the Company and Security Pacific
                        National Bank. (2)
               4.3      Rights Agreement between the Registrant and Continental Stock Transfer & Trust Company
                        dated April 19, 1988 restated and amended October 21, 1994. (6)
               4.4      Form of Common Stock Certificate. (11)
              10.1      Form of Stock Option Agreement. *(3)
              10.2      Form of Indemnity Agreement as amended March 24, 1994. *(5)
              10.3      The Company's Employee Savings Plan as amended and restated as of June 30, 1993. *(4)
              10.4      1988 Incentive Stock Option and 1988 Non-statutory Stock Option Plans, as amended. *(6)
              10.5      Employment Agreement dated January 1, 1995 between the Company and Chriss W. Street. *(6)
              10.6      Directors and Officers Trust dated February 27, 1995 between the Company and Mark Twain
                        Bank. *(7)
              10.7      Comprehensive Care Corporation 1995 Incentive Plan. *(9)
              10.8      Amended and Restated Non-Employee Director's Stock Option Plan. *(8)
              10.9      Restricted Stock Grant between Chriss W. Street and the Company dated November 9, 1995.*(9)
              10.10     Series A Non-Voting 4% Cumulative Convertible Preferred Stock Exchange Agreement. (10)
              10.11     Letter Agreement dated April 4, 1997 between the Company and Chriss W. Street. *(12)
              10.12     Employment agreement dated September 14, 1998, between the Company and Chriss W. Street. *(13)
              10.13     Employment agreement dated September 14, 1998, between the Company and Robert J. Landis. *(14)
              16.       Letter dated May 19, 1999 from Ernst & Young, LLP ("E&Y") in concurrence with the Company's statement
                        made concerning E&Y's dismissal as the Company's principal accountant. (16)
              21.       List of the Company's active subsidiaries (filed herewith).
              23.       Consent of Richard A. Eisner & Company, LLP (filed herewith).
              27.       Financial Data Schedules (for SEC use only).
              99.1      Comprehensive Care Corporation 1995 Incentive Plan, as amended on November 17, 1998. (15)

</TABLE>
------------------

* Management contract or compensatory plan or arrangement with one or more
directors or executive officers.

(1)      Filed as an exhibit to the Company's Form S-3 Registration Statement
         No. 2-97160.
(2)      Filed as an exhibit to the Company's Form 8-K dated May 4, 1988.
(3)      Filed as an exhibit to the Company's Form 10-K for the fiscal year
         ended May 31, 1988.
(4)      Filed as an exhibit to the Company's Form 10-K for the fiscal year
         ended May 31, 1991.
(5)      Filed as an exhibit to the Company's Form 10-K for the fiscal year
         ended May 31, 1994.
(6)      Filed as an exhibit to the Company's Form 10-Q for the quarter ended
         November 30, 1994.
(7)      Filed as an exhibit to the Company's Form 10-Q for the quarter ended
         February 28, 1995.
(8)      Filed as an exhibit to the Company's Form 10-K for the fiscal year
         ended May 31, 1995.
(9)      Filed as an exhibit to the Company's Form 8-K dated November 9, 1995.
(10)     Filed as an exhibit to the Company's Form 8-K dated January 30, 1997.
(11)     Filed with original of Registration Statement on Form S-1, dated
         January 29, 1997.
(12)     Filed as an exhibit to the Company's Form 10-Q for the quarter ended
         February 28, 1997.
(13)     Filed as an exhibit to the Company's Form 8-K dated September 24, 1998.
(14)     Filed as an exhibit to the Company's Form 8-K dated September 24, 1998.
(15)     Filed as an exhibit to the Company's Form 8-K dated November 25, 1998.
(16)     Filed as an exhibit to the Company's Form 8-K dated May 19, 1999.



                                       53
<PAGE>   54
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES


(b) Reports on Form 8-K.

1)       The Company filed a current report on Form 8-K, dated March 17, 1999,
         to report under Item 5 that the Company would not be selected to be the
         provider of behavioral healthcare services for Humana Health Plans of
         Puerto Rico.

2)       The Company filed a current report on Form 8-K, dated April 23, 1999,
         to report under Item 6 that the Company had accepted the resignations
         of Mr. A. Richard Pantuliano, a Class III Director and Messrs. William
         H. Boucher and J. Marvin Feigenbaum, each a Class I Director and that
         Ms. Mary Jane Johnson and Mr. Robert J. Landis had been elected as a
         Class I Director and a Class III Director respectively.

3)       The Company filed a current report on Form 8-K, dated May 19, 1999, to
         report under Item 4 that the Company had engaged Richard A. Eisner &
         Company, LLP and dismissed Ernst & Young, LLP as its independent
         accountants to audit its financial statements for the fiscal year ended
         May 31, 1999.





                                       54
<PAGE>   55
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES



                                   SIGNATURES

         Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, August 26, 1999.

                        COMPREHENSIVE CARE CORPORATION

                 By   /s/      CHRISS W. STREET
                 --------------------------------------------
                               Chriss W. Street
                         (Principal Executive Officer)


                 By   /s/      ROBERT J. LANDIS
                 --------------------------------------------
                               Robert J. Landis
                 (Principal Financial and Accounting Officer)


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates so indicated.


<TABLE>
<CAPTION>
SIGNATURE                                                  TITLE                                    DATE
---------                                                  -----                                    ----
<S>                                               <C>                                           <C>
                                                  Chairman of the Board of Directors,
/s/   CHRISS W. STREET                            President, and Chief Executive Officer
--------------------------------------            (Principal Executive Officer)                 August 27, 1999
Chriss W. Street

                                                  Executive Vice President,
                                                  Chief Financial Officer, Treasurer,
/s/   ROBERT J. LANDIS                            and Director (Principal Financial
--------------------------------------            and Accounting Officer)                       August 27, 1999
Robert J. Landis


                                                  Executive Vice President,
/s/   MARY JANE JOHNSON                           Chief Operating Officer and
--------------------------------------            Director                                      August 27, 1999
Mary Jane Johnson
</TABLE>



                                       55